DeFi Assets Crash, Bitcoin Exhibits Correlation with the U.S. Stock Market

Over the past week, bitcoin and cryptocurrency prices have tumbled. The crypto market as a whole has lost almost $1.4 trillion in value. The collapse has prompted warnings of a “crypto winter,” which some say may be worse than previous ones. Additionally, DeFi assets are volatile and have not been immune to the market downturn.

DeFi Assets Crash

The global DeFi market has crashed. While the crypto markets are beginning to recover following the devastation witnessed, some sectors were more severely affected than others. The market collapse affected metaverse and DeFi tokens assets the hardest.

According to Bloomberg, a measure tracking major DeFi tokens has failed to rebound following a 24% drop over the weekend. According to the report, the sector was already struggling before this latest flash crash. The DeFi Pulse Index was down 62.5% over the past seven months.

The crypto flash crash helped to show how the digital asset world has cooled recently. The corner of decentralized finance was one of the hottest before, but it is not now. Many DeFi tokens have dropped further and have yet to recover. However, Bitcoin and other rivals have mostly stabilized or risen from lows of about 20% seen over the weekend.

The DeFi Pulse Index, which includes tokens such as Aave, Balancer, Compound, Sushi, Synthetix, Uniswap, Yearn, and Badger, fell by 24%. On top of the existing poor performance for crypto assets associated with decentralized finance applications. These services enable individuals to lend, borrow and trade without intermediaries.

DeFi has been affected more because many tokens have a very small group of holders. DeFi’s wounds are partly self-inflicted. For example, BadgerDAO got hacked last week. It is not clear how much money was taken. However, one researcher claimed it could be as much as $120 million. Meanwhile, there is infighting among developers at Sushi that is adding to the uncertainty.

Bitcoin and the U.S. Stock Market

Bitcoin’s past performance suggests that the asset class is more akin to equities than gold. While bitcoin has often been referred to as a rival to gold, its long-term price trends suggest it is instead linked to stocks.

In the fourth quarter of 2018, when stocks went down by nearly 20%, bitcoin also went down by 50%. Gold had an 8% increase. A hawkish Federal Reserve caused the market volatility, and people worried about trade tariffs.

In early 2020, when the COVID-19 pandemic had just begun, bitcoin fell almost 50% while stocks fell as much as 34%. However, gold held steady during this period, proving its status as a safe-haven asset.

Finally, amid a nearly 7% decrease in the S&P 500 since the start of 2022, bitcoin has fallen 17%, whereas gold is unchanged. The numbers show that for now, bitcoin is less of a hedge against inflation and more of a high-risk/high-reward asset that performs well when equities do well and vice versa.