Sentiment is much worse now, but a recovery will still likely happen eventually.
The frightening Feb. 5 air pocket in crypto was a reminder that bad headlines aren’t the only thing that can cause crypto markets to absolutely crater. While it’s still unclear what sparked the sell-off, it was nonetheless a remedial lesson for many investors that Bitcoin (CRYPTO: BTC) still sets the tone for the sector. That’s even the case when leading assets like Ethereum (CRYPTO: ETH) and Solana (CRYPTO: SOL) have their own stories, which (in theory) shouldn’t be affected by anything that happens to Bitcoin.
The next few moves in this market will probably test your patience. Here’s what Bitcoin’s big stumble is going to do for other crypto majors.
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In the run-up to the collapse, the mood was quite ugly across the board, which paved the way for Bitcoin to crash by 14% on Feb. 5 before rebounding somewhat in the following days. From Jan. 30 to Feb. 6, Bitcoin fell about 25%, taking Solana down by 33% and Ethereum down by 35% along with it.
It’s a common story that when investors’ risk appetite breaks, for whatever reason, assets can become more correlated very quickly. That happens because crypto is still treated as a single risk bucket during periods of stress. People sell what they have on hand, not just what they dislike, and they often sell because they’re being forced to meet margin calls or other institutional financial constraints.
If Bitcoin keeps whipping around, you should assume that the rest of the market will remain panicked and flighty, even if no new bearish (or bullish) news develops with Ethereum or Solana. Still, there are a couple of things about those coins that are likely to be relevant over the next few months.
Ethereum has a real tailwind in scaling that’s starting to develop. Its roadmap has moved toward creating the technical groundwork for dramatically lowering its transaction costs while also increasing its chain performance and throughput.
But Ethereum also has a headwind. Improving its scaling also works against its fee model, as lower costs imply fewer coins burned, and thus less upward pressure on prices for holders. It’s unclear how, or if, that issue will get resolved.
In contrast, Solana’s pitch remains high speeds and low costs, and it has been pushing hard on its chain’s reliability and its user diversity. A major new validator client going live on its mainnet in December is part of that effort, and it might attract more capital to the chain this year.
But presently, Solana’s big risk is demand quality.
If the chain’s activity mix leans too heavily on cyclical pockets of speculation, such as projects intended for gambling on meme coins, it can underperform for longer after a sectorwide drawdown. In other words, investors might stop paying up for growth until the source of the growth looks durable enough to last, which speculation-oriented projects simply cannot deliver.
So right now’s a very risky time to be buying crypto. But the picture is likely to be a bit less gloomy in a few weeks or a couple of months, when the dust has settled.
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Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
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