A brutal bout of selling that wiped billions of dollars from profitless growth companies, IPO stocks and SPACs has now caught up with bitcoin, further stressing risk tolerances and brokerage balances among small-time traders.

Retail dip-buyers, whose willingness to stand firm amid turmoil has helped power the S&P 500 to a 21 per cent gain in 2021, are nursing some of their worst wounds of the year as losses pile up in speculative corners. A hawkish turn from the Federal Reserve and the omicron variant have erased more than 10 per cent off the market value of cryptocurrencies, $US50 billion from newly public companies and 14 per cent from a basket of meme stocks.

While day-trader resolve has been tested before, it’s been years since it happened without the open-ended support from central banks, whose changing tone around inflation sent risk markets spinning last week. Professional speculators have already voted, offloading risk at the fastest pace in 20 months.

Big drops in an asset like bitcoin have the potential to lower confidence among the larger population of bettors, a concept described as negative wealth effect. All told, crypto investors have some $US250 billion less to play with in their accounts than they did when stocks starting sliding on November 26. It’s a worrisome backdrop for the market ahead of the S&P 500 futures open at 6 p.m. in New York.

“Buying the dip did not work well last week, so the retail traders could be pulling in their horns a bit,” said Matt Maley, chief market strategist for Miller Tabak + Co. “Since they have been so important to the demand side of the supply/demand equation this year, their absence is an unwelcome development for the bulls.”

If bitcoin, which trades around the clock, is any indication, markets will be in for more volatility. The cryptocurrency lost as much as 21 per cent since Friday’s stock-market close and swung wildly throughout the weekend. The decline brought it down to around $42,290 at one point, well below its record high of near $69,000 just a few weeks ago. Meanwhile, bitcoin futures open interest is also plunging and funding rates on a few major exchanges turned negative, meaning those with short positions are paying a premium - all signs crypto positions are in a liquidation frenzy.

The past week’s retreat across stocks and cryptocurrencies provided more evidence that bitcoin is an imperfect hedge for institutional portfolios. While it has an alluringly near-zero correlation with major asset classes, whenever stocks have sold off 5 per cent or more over a month over the past decade, bitcoin has dropped 86 per cent of the time with an average 13 per cent decline, asset manager Man Group wrote in a recent note.

“Bitcoin is seen as a key risk-on/risk-off asset, so if it stays down - and especially if it continues to fall - it will be a big red warning flag for other risk assets next week,” Maley said.