Cryptocurrencies slumped mid-afternoon in Asia, extending a downbeat trading session overnight that saw many major tokens fall by nearly 10%. 

Bitcoin and Ethereum were down as much as 7% in the last 24 hours, with the former falling below US$40,000 for the first time in a month and the latter below US$3,000 for the first time since late March. Bitcoin and Ethereum were down more than 5% each at US$40,136 and US$3,021 respectively. 

A number of macro-economic factors were behind the global sell-off in equities, bonds and commodities, which triggered a risk-off mood in risk assets such as cryptocurrencies, market watchers told Forkast.

“A side effect of crypto markets maturing is an increased correlation with traditional markets,” said Justin d’Anethan, institutional sales director at Amber Group. “As more sophisticated investors and funds allocate to BTC or ETH, they manage that position in relation to others.” 

The Dow Jones Industrial Average closed down 1.2% with the S&P 500 losing 1.7%. The Nasdaq Composite fell 2.2%.

“We’ve never had crypto in a seriously inflationary environment before,” said Andrew Sullivan, founder and writer for The wider uncertainty adds to a tepid outlook, he added. “We certainly haven’t had it where you’ve got inflation, a war going on and a pandemic.”

Shanghai Slump

Investors were shaken by concerns that an ongoing pandemic-related lockdown in Shanghai could disrupt global supply chains and dampen demand from the world’s second-largest economy. 

More than 26 million residents in the city have been forbidden from leaving their homes for more than two weeks, with access to food restricted. 

“They (Shanghai residents) are obviously more worried about food than they are about cosmetics or iPhones or computers,” said Sullivan, adding there was a “big concern” over the impact of a reduction in demand from the mainland.

Sullivan said investors were also skittish amid worries that high inflation could spark fresh rounds of policy tightening. 

The Federal Reserve is expected to remain hawkish due to the country’s worst inflation run in 40 years. Its target policy rate was increased to between 0.25% to 0.50% in mid-March for the first time since 2018.  

Higher fuel prices due to the ongoing conflict in Ukraine were another factor weighing on the outlook, according to Sullivan. 

The rising cost of everyday goods could force retail investors to rethink their spending and investment patterns, as households stretched to the breaking point are forced to make difficult choices.

“A lot of people have bought Bitcoin or cryptocurrencies as an investment, as a hedge,” Sullivan said. “But when times become tight, they’re going to have to sell to use that income if the rates or the returns that they’re getting aren’t sufficient.”

Amber Group’s d’Anethan noted a silver lining to the developments.

“How long the downturn will last remains to be seen,” d’Anethan said. “But it might be that the pain brought on by macro markets is a blessing in disguise for the long-term crypto investor.”