The catalyst for today’s selloff appears to be the release of hawkish minutes from the Federal Reserve that showed the central bank is considering raising interest rates and winding down its economic stimulus at a faster pace than previously expected.
Since hitting an all-time high above $68,000 on Nov. 10, BTC has declined 36% to its current price of $42,900. ETH has come down 30% over the same period. The rout in cryptocurrencies appears to be gaining steam as skittish investors seek safer, less speculative assets as the Fed enters into a monetary policy tightening cycle.
Why Is Crypto Crashing Today?
Minutes from the most recent Fed policy meeting held in December showed that central bank officials see a strengthening economy and higher inflation as reasons to raise interest rates at a faster clip, news that roiled American stock markets. The minutes also showed that some policymakers favor starting to shrink the central bank’s balance sheet and ending the stimulus that it had been providing to the U.S. economy.
Cryptocurrencies weren’t the only asset class to fall sharply. The S&P 500 declined 1.9% at the close, its biggest loss since last November. Meanwhile the technology heavy Nasdaq shed more than 2% of its value. Yields on the 10-year Treasury rose to highs not seen since April 2021, and overnight swaps markets priced in an 80% chance that the Fed will hike interest rates 25 basis points in March.
Why It Matters
Cryptocurrencies remain a controversial investment vehicle that seem to attract proponents and detractors in equal measure. While many of the most successful and influential investors in the world champion cryptocurrencies, others dismiss digital coins and tokens as having no real underlying value. Investors need to determine if the selloff is a sign of a bigger issue and more losses to come, or a short-term decline that will reverse. Some analysts have forecast that the price of Bitcoin will reach $100,000 this year.
Other issues weighing on cryptocurrencies, in addition to the Fed’s hawkish stance, are ongoing threats by the U.S. Securities and Exchange Commission to regulate the sector and an ongoing crackdown on cryptocurrency mining and transactions in China. There are also environmental concerns related to the amount of energy needed to mine for cryptocurrencies. Taken together, these issues have dragged down the entire market, with smaller cryptocurrencies such as Litecoin (CCC:LTC-USD) and Dogecoin (CCC:DOGE-USD) also plummeting.
The decline in cryptocurrencies looks set to continue this week as part of broader market volatility. The question is whether prices can stabilize or if the declines will snowball in coming weeks and months. It’s hard to know how bad the current rout will get. What is known is that interest rates are going to rise in coming months and the economic stimulus provided by the Federal Reserve is going to be dialed back aggressively. In this environment, investors are inclined to get defensive and speculative assets such as cryptocurrencies will suffer as a result.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.