Meanwhile, the Fed’s abrupt dumping of its conviction that high inflation rates were “transitory” has further contributed to the sudden unease.

The VIX index – which measures volatility and is sometimes described as the “fear index” -- had been broadly flatlining below 20 per cent through November but suddenly spiked above 30 per cent last week.

No-one would sensibly accept Bitcoin in exchange for real goods or services when the price can move 20 per cent in an hour.

The plunges in the value of crypto assets reflected that wider volatility and risk-aversion but magnified it, in spades.

There are a number of possible strands to the explanation for why the movement in cryptos was so much more violent than in conventional assets, even those – like technology companies, whose high priced-earnings multiples make them more sensitive to shifts in risk appetites.

One is that the market, even when it was at $US3 trillion, remains relatively small and illiquid. The US equities market is valued at more than $US50 trillion and has deep liquidity.

A function of the shallow levels of liquidity in crypto markets is that the price movements, in both directions, will be magnified by any increase in trading activity. While the increased involvement of institutional investors and hedge funds in crypto markets this year is a longer-term positive for their credibility and depth, it brings derivative and leveraged exposures into small, immature and not particularly transparent markets.

There does appear to have been significant levels of derivative and leveraged trading in cryptos last week – a lot of positions in Bitcoin futures were abruptly closed out as the price went into freefall.

Under these circumstances, as the sell-off of riskier assets accelerated, it isn’t surprising that the market for crypto assets was hit much harder than that for conventional investments. The “mainstreaming” of crypto is a double-edged sword.

Crypto investors are, of course, used to wild rides and appear to regard every crash in their value as an opportunity. Bitcoin, it should be said, is still up nearly 60 per cent from the start of this year.
The experience of the past week, however, does underscore the uselessness of cryptocurrencies as alternatives to fiat currencies as media of exchange.

No-one would sensibly accept Bitcoin in exchange for real goods or services when the price can move 20 per cent in an hour. It is a medium for speculation, not exchange.

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Nor does it work as a diversifier when it is needed to be one.

While in calmer conditions, there appears little correlation between crypto assets and the other major asset classes, whenever there is turbulence and prices fall in the sharemarket they move in sync – but the movement is almost three times as great as that experienced in the sharemarket.

The overall market is still working its way through the implications of the outbreak of Omicron and the sudden shift in the Fed’s stance. US inflation numbers are due out this Friday and will provide some new data for the Fed and investors to absorb.

Until a more settled view on the outlooks for the pandemic, economies and monetary policy settings emerges, investors are likely to remain risk-conscious and the markets volatile.

For crypto investors, that might mean experiencing more wild rides like the one that occurred late last week and built so explosively into the weekend. For traders that would provide opportunities, and for investors it would generate anxiety.

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