The developing narrative of ether and alternative cryptocurrencies, or altcoins, decoupling from bitcoin in an adverse macro environment went up in smoke on Friday as a sell-off in stocks and the largest cryptocurrency caused extensive damage to the broader crypto market.

Bitcoin fell to a five-month low of $38,300 during the Asian hours, an 8% slide on a 24-hour basis.

Ether, the second-largest cryptocurrency, tanked 10%, printing lows near $2,800. The convincing move under $3,000 saw some traders book bearish option strategies, Swiss-based derivatives analytics platform Laevitas said.

While binance token slipped 10%, native tokens of Looping, Yearn Finance, Compound and Aave fell between 12% and 15%, CoinDesk data show. Recent outperformers such as Fantom’s FTM and Cosmos’s ATOM dropped 10% and 5%, respectively.

All crypto market sectors, including gaming and metaverse, traded in the red and suffered more significant losses than bitcoin.

“It appears as though the whole market is simply correlated to equities now,” Laevitas said. “So it will be interesting to see how that evolves with the Federal Reserve looking increasingly likely to raise rates faster.”

The price action perhaps indicates that the market value of cryptocurrencies promising sound money and democratized finance is heavily dependent on centralized liquidity – the Fed’s money printing program.

Ether and the broader crypto market had stayed relatively resilient following bitcoin’s early December crash to a then two-month low of $42,000. That had several observers calling a continued ether outperformance heading into 2022.

Equities play spoilsport

Bitcoin began losing ground overnight after the tech-heavy Nasdaq 100 and the S&P 500 erased early gains and ended Thursday with losses of more than 1%.

“Currently, the S&P 500 seems to dictate the direction of bitcoin and the overall crypto market, evident by correlations reaching new highs. Bitcoin’s 90-day correlation to the S&P 500 is currently at its highest since October 2020,” Arcane Research’s weekly note published Tuesday said.

According to Kaiko Research, bitcoin’s 30-day correlation with the Nasdaq 100 and S&P 500 has risen to 17-month highs in the wake of the Fed funds futures pricing in four Fed rate increases for 2022.

“We’re now expecting FIVE Fed rate hikes this year,” David Belle, founder of Macrodesiac.com and U.K. growth director at TradingView, told CoinDesk in a WhatsApp chat. Earlier this week, Anna Wong, the chief U.S. economist for Bloomberg Economics, said a 50 basis-point Fed increase is warranted at the March meeting.

Even ether, which is more associated with decentralized finance (DeFi) and non-fungible tokens (NFTs) than with the inflation trade, seems to be tracking equities. According to blockchain analytics firm IntoTheBlock, ether’s 30-day correlation with Nasdaq has strengthened to 0.86.

More pain ahead?

The key to sustainable bitcoin price recovery is renewed institutional participation, which remains elusive.

“The awaited institutional inflows have still not returned, and with that $40,000 BTC support broken, the wider market has been pushed lower,” Laurent Kssis, a crypto exchange-traded fund (ETF) expert and director of CEC Capital, said.

Kssis added that the short-term perspective looks bleak with the futures market data showing potential for more liquidation of longs – the forced closure of bullish positions due to margin shortage – which, in turn, leads to a deeper decline.

“There are still $100 million worth of longs open, half of which is on BitMEX exchange which I had not seen for a while,” Kssis said. “Since BTC dropped overnight, these long positions on leverage are margin called, and it’s only a question of time.”

Traders will be keenly watching bitcoin’s UTC close on Friday, as potential failure to rise back above $40,00 may invite more chart-driven selling. “The loss of the $40,000 mark today will likely lead to more bearish sentiment, which in turn could push the price further down – it could even test last July’s low of $30,000,” Robbie Liu, a researcher at crypto financial services provider Babel Finance, said in an email.

“In addition, as we near the Lunar New Year, Chinese investors’ demand to cash out is also putting the market under greater selling pressure,” Liu added. China’s week-long Lunar New Year holiday begins on Jan. 31.

UPDATE (Jan. 21, 10:42 UTC): Adds quote from Babel Finance at the end.