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The world’s largest digital token, Bitcoin, rebounded from a swoon below $30,000 as a selloff in stocks eased and a bout of calm washed across global markets.

The cryptocurrency fell to $29,731 on Tuesday, its lowest level since July 2021, after dropping nearly 12% last week, its worst weekly loss since January.

Ether, the world's second largest cryptocurrency, at one point climbed 6.4%, while coins such as Solana and Avalanche were also in the green. 

The crypto recovery came as equities advanced across Europe, highlighting how the two asset classes are trading in tandem.

Bitcoin’s recent plunge has taken it to levels last seen in the middle of 2021, reversing a bull market that peaked in November. Whether the calm will last is an open question. 

Tightening monetary policy to combat runaway inflation is curbing liquidity, creating a formidable obstacle for speculative assets like cryptocurrencies. 

WHAT HAPPENS IN A RECESSION?

It is not just crypto markets that are tumbling. Equity markets have also plunged as investors fear global central banks are willing to push economies into recession, if necessary, to rein in inflation.

"What's interesting is that bitcoin itself hasn't declined quite as much as the Nasdaq and some other asset classes, but the correlation has tightened between them. It's certainly a higher correlation than we've seen in the past," said Benjamin Dean, director of digital assets at WisdomTree in London.

The Nasdaq and S&P 500 posted their fifth straight week of declines last week and the Dow Jones its sixth. It was the longest losing streak for the S&P 500 since mid-2011 and for the Nasdaq since late 2012.

Crypto's correlation with stocks is one reason for its recent crypto sell-off.

‘Things to get worse before they get better’

Michael Novogratz, the billionaire cryptocurrency investor who leads Galaxy Digital Holdings Ltd., warned that he expects things to get worse before they get better. Among challenges facing digital assets is that they’re increasingly trading in line with technology stocks, which are getting hammered by rising interest rates. 

“Crypto probably trades correlated to the Nasdaq until we hit a new equilibrium," Novogratz said on Galaxy’s first-quarter earnings call on Monday, adding that investors may see “a very choppy, volatile and difficult market for at least the next few quarters before people are getting some sense that we’re at an equilibrium." 

The crypto market is also monitoring TerraUSD, an algorithmic stablecoin that aims to maintain a one-to-one peg to the dollar. The peg appeared to fray, with the token’s value falling close to 60 U.S. cents before climbing back above 90 cents on Tuesday.

Do Kwon, the founder of Terraform Labs, which powers the Terra blockchain, is moving to shore up the stablecoin. Luna Foundation Guard, the association created to support the decentralized token and Terra blockchain, said it will issue loans worth about $1.5 billion in Bitcoin and TerraUSD to help strengthen TerraUSD’s peg.

Kwon captured the attention of the crypto world earlier this year by pledging to buy as much as $10 billion in Bitcoin to prop up TerraUSD. The Luna coin, which functions in tandem with TerraUSD, has tumbled about 50% in the past 24 hours, according to data from CoinGecko. 

Breaking Lower

Bitcoin is down more than 50% since hitting a record of almost $69,000 in November and has underperformed both global stocks and gold so far in 2022. The recent rout also broke it out of the narrow trading range where the token has spent most of this year, prompting some technical analysts to predict more pain ahead. 

Jeffrey Halley, a senior market analyst at Oanda, said in a note that technical patterns suggest Bitcoin could slump into the $17,000 area. 

“That is a big call, and it does seem to be making a stand ahead of $30,000.00" Halley wrote. “Realistically, it needs to reclaim $37,000.00 to change the technical outlook and give the HODLers hope of a good night’s sleep."

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