Today's downturn affected prominent cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin.
The cryptocurrency surge witnessed during the autumn and early winter had a temporary halt within the past 24 hours following the Federal Reserve's decision to decrease interest rates. Initially, this might appear to be a favorable event. However, the Fed also forecasted that inflation and joblessness would rise above anticipated levels in 2025 as part of the rate reduction. Consequently, investors are selling off risky assets today.
Bitcoin (decrease of 3.13%) is the most affected, losing 6.2% within the last 24 hours and slipping beneath the $100,000 mark. Ethereum (decrease of 3.75%) has dropped 9.7% to $3,350, while Dogecoin (decrease of 7.25%) is down 16.8% to $0.3032.
The Influence of the Federal Reserve on Cryptocurrencies
Despite being marketed as an escape from traditional financial systems, the cryptocurrency market behaves quite similarly to conventional risk assets such as growth stocks. Consequently, when interest rates rise, growth stocks decrease, and the cryptocurrency market follows suit.
I've previously mentioned that the Federal Reserve cut rates, but the market interpreted the inflation discussion as a potential risk to long-term bonds, leading to an increase in bond yields after the announcement. As reported by Bloomberg, the 10-year government bond rose by 6 basis points over the past day and has increased by 64 basis points within the past year.
As observed in 2022, higher interest rates typically result in decreased valuations for cryptocurrencies.
Is a Fear of Missing Out (FOMO) Cycle Coming to an End?
This recent crypto surge began following the election with an increase in speculation about President-elect Donald Trump triggering a bull run in the crypto market. While this might still occur, the gains did not align with any fundamental changes within the industry.
Fear of missing out, or FOMO, led to inflated valuations, and this FOMO may now be waning.
Additionally, there was speculation that Bitcoin would be purchased by the U.S. government as a reserve or used as a reserve by other governments. However, as declared by Fed Chair Jerome Powell, the Federal Reserve is prohibited from acquiring Bitcoin, a potential disappointment to some investors.
This appears to be an instance of "buy the rumor, sell the news" in investing, where dissatisfaction sets in following the release of results or news, even in situations as straightforward as the Fed refusing to buy Bitcoin.
Uncertainties heading into 2025
The considerable gains observed throughout the past year were primarily driven by speculation and the momentum of events such as ETF approvals and the election. However, in 2025, there may be fewer of these boosts, and pricing will be determined by the influx of new buyers, like Bitcoin.
It's also worth noting that MicroStrategy has also endured losses and its arbitrage strategy is less appealing without a substantial premium. Moreover, MicroStrategy is the largest individual buyer of Bitcoin, with its substantial purchases having a significant impact on Bitcoin's price. Consequently, the decrease in Bitcoin implies a drop in crypto, indicating that everything is lower today.
In light of the Fed's predicted rise in inflation and joblessness by 2025, investors are cautiously approaching their finance strategies, even in the cryptocurrency market. This recent shift in the market has led to significant drops in the values of cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin, making it a challenging time for investors who rely on money from these assets.
Given the Fed's restrictions on Bitcoin acquisition, the fear of missing out (FOMO) cycle in the crypto market might be gradually subsiding, suggesting a potential shift in investing strategies in the coming years.
