(Bloomberg) -- For a brief moment, everything appeared to be lining up in the right direction for digital-asset proponents. The US approved ETFs for the two largest cryptocurrencies, US presidential candidate Donald Trump shifted to being a supporter and Bitcoin was no longer so closely tied to stock market swings.

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That was the prevailing narrative until a selloff in the riskier corners of all markets began during Asian trading hours on Monday, serving as a reminder that the volatile nature of digital assets can cut both ways in a year that saw Bitcoin climb to record highs. At one point Bitcoin was down more than 16% on Monday, while second-ranked Ether sank as much as 23% in its steepest decline since 2021.

“Every point of selling off — you know, market sells off 1% — it hurts confidence,” said Rich Rosenblum, co-chief executive officer and co-founder of digital-asset investment firm GSR. “I would say for crypto there is even more elasticity to confidence than any other market in the world because Bitcoin is a Veblen good.”

Veblen goods are type of luxury item for which demand grows as prices increase. That was the case in crypto for much of the first half of the year, especially after the US Securities and Exchange Commission authorized Bitcoin and Ether exchange-traded funds. Bitcoin soared to a record high of almost $74,000 in March, with proponents urging investors to buy because demand from the ETFs would outstrip supply. Bitcoin fell below $50,000 at its lows of the day on Monday, cutting in half year-to-date returns that in March were about 70%.

Just two weeks ago, Bitcoin and global stocks were diverging as Trump’s electoral push and tightening embrace of crypto bolstered the largest digital asset, while equities wavered on an uncertain economic outlook. The 30-day correlation coefficient for Bitcoin and MSCI’s index of world stocks reached minus 0.20, a rare occurrence for a measure that typically had been positive since 2020, data compiled by Bloomberg show. A correlation of 1 indicates assets are moving in lockstep, while minus 1 signals a lockstep inverse relationship.

Bitcoin has quickly become more correlated again as the the global stock selloff intensified, reflecting concerns about the economic outlook. Geopolitical tension is rising in the Middle East, adding to investor skittishness.

Weak Data

“Payrolls looked weak, unemployment looked weak,” said Leo Mizuhara, chief executive officer and founder of decentralized finance asset manager Hashnote. “It was one of the first strong signals that the Fed might be behind the curve” on cutting interest rates, he said, adding that’s “bad for risk assets.”

US spot-Bitcoin exchange-traded funds suffered their largest outflows in about three months on Aug. 2. Monday’s selloff will further hurt demand for the ETFs, according to Mizuhara.

“This move reminds me a bit of March 2020 at the start of Covid,” said Annabelle Huang, managing partner at digital-asset firm Amber Group. Hopefully, she added, “we can see some sort of V-shape recovery like back then, but it’s all dependent on all the macro factors.”

Despite Bitcoin’s choppy performance over the past few months prior to the recent selloff, the largest digital asset also received a boost in recent weeks from former President Trump, who announced that he’d create a “strategic national Bitcoin stockpile” if he returns to the White House. Crypto critics have raised questions about the feasibility of such a Bitcoin stockpile, especially when a selloff like this is always a risk.

Holding Bitcoin as a strategic reserve is a “crackers idea,” said Virginie O’Shea, founder and chief executive of Firebrand Research. “If you want a reserve, you need something that’s relatively stable in unstable markets. Cryptocurrencies are the exact opposite.”

The selloff has also led to a drop in market liquidity, according to an analysis by data provider Kaiko. Bitcoin’s 1% market depth on major crypto exchanges including Binance, Bybit, Bitfinex, and Coinbase has decreased by more than 40% since the beginning of August to $86 million, according to Kaiko senior analyst Dessislava Aubert. Kaiko defines this measure of market depth as the average volume of Bitcoin trading within 1% of its current price, on a 24-hour basis.

“If the rout deepens, we could see a further drop as market makers are likely to reduce their exposure to avoid toxic flows,” said Aubert. “We are observing a similar drop in the top ten altcoins.”

Memecoins, which are tokens without any utility, were also hit hard by the market drop. Dogecoin and Shiba Inu fell by down by more than 10%, according to tracker CoinGecko. Memecoins had been in the spotlight of the crypto community since some were posting even bigger gains than Bitcoin in the past year’s bull run. Since memecoins are a more volatile category, they always suffer in such situations since “there’s a trend to fly to safety” during panics, said Rachel Lin, chief executive of decentralized derivative exchange SynFutures.

Still, as is usually the case, crypto advocates remain optimistic about the market outlook, saying the positive factors that had been pushing the market up will remain in place for the coming months.

“It’s a transition, just like in tradfi, from shorter-term derivatives positioning into longer-term hands,” said Zaheer Ebtikar, founder of crypto fund Split Capital.

--With assistance from Emily Nicolle.

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