On Tuesday (July 5), Cesare Fracassi, Chief Economist of the Coinbase Institute, explained the “recent decline in crypto markets” in a research report titled “Coinbase Institute Research: Crypto Prices and Market Efficiency”.

Fracassi’s report, which was published earlier today on the Coinbase blog, started by saying that “over the last eight months, the market capitalization of all cryptocurrencies went from a peak of $2.9T to a current level of less than $1T, a decline of over two thirds.”

He then went on to say that “examining the crypto markets based on an understanding of market efficiency can help us interpret the data.”

Fracassi noted that currently crypto is behaving very similar to tech stocks:

In particular, crypto assets today share similar risk profiles to oil commodity prices and technology stocks. Beta is a typical measure of systematic risk for financial assets. A beta of zero means that the asset is uncorrelated with the market. A beta of one means that the asset moves together with the market.

A beta of two means that when the stock market rises or falls by 1%, the asset increases or decreases by 2%. The animation below shows that the betas of bitcoin and ethereum have jumped from 0 in 2019, to 1 in 2020–2021, and to 2 today — they are now very similar in risk profile to a more traditional asset, technology stocks.

Next, he pointed out that although it is clear that the Fed tightening of monetary policy has hurt the prices of both tech stocks and cryptoassets, we cannot say that 100% of the decline in crypto prices is due to the worsening macro environment:

It might be useful to consider how much of the current decline is due to worsening macroeconomic conditions, as opposed to souring outlook specifically for cryptocurrencies, especially considering the crypto market cap declined over 57% year-to-date in 2022. It’s worth noting that during the same time, the S&P 500 declined 19%, and if macroeconomic conditions were the only cause of the decline, we would have expected crypto assets, with a beta of 2, to drop by about 38%.

We can thus roughly estimate that two-thirds of the recent decline in crypto prices can be attributed to macro factors, and one-third to a weakening of the outlook solely for cryptocurrencies. This is similar to what happened during the 2000–2001 dot-com recession, where the S&P 500 declined 29%, and the Nasdaq composite index (composed heavily of tech stocks), with a beta of 1.25, declined 70% from peak to trough.

Finally, Fracassi noted that “the market-efficiency view” cannot predict “the direction of crypto prices in the future,” and ended his blog post by saying that “according to the market-efficiency view of crypto markets, only changes in the outlook of the crypto industry relative to what is already expected will bring changes to prices.”