What happened
Stocks of several cryptocurrencies are down today for no apparent reason. But the drive appears to be fraught with macro issues as investors continue to grapple with the direction of the market.
Since late yesterday afternoon, the price of the world’s largest cryptocurrency, Bitcoin (BTC -3.20%), was trading down 3.4% to trade at $29,236 at 9:43am ET today. Meanwhile, the price of the second largest cryptocurrency in the world, ether (ETH -5.31%)traded 5.1% lower while meme token Shiba Inu (SHIB -3.80%) Traded 4.8% lower.
so what
Bitcoin has had a great run and is now up 76% this year. Much of this gain appears to have been driven by macro issues such as expectations of an imminent end to rate hikes, a weakening US dollar and troubles in the mainstream banking system.
Image source: Getty Images.
But now the banking system — to which bitcoin, cryptocurrencies, and blockchain were created as an alternative — has shown signs of stabilizing. In addition, an end to rate hikes at the US Federal Reserve’s May meeting now looks unlikely. More than 88% of traders are betting on a quarter-point increase over the next month, which is significantly higher than what we’ve seen in the past few weeks.
There is also a lot of discussion about interest rates. While the market is anticipating rate cuts this year, some are still wondering if this narrative will actually hold true.
“There have been some signs that the Fed may be more aggressive toward higher interest rate policies than the market is pricing in, which has driven yield differentials in favor of the U.S. dollar while weighing on sentiment,” LMAX market strategist Joel Kruger told CNBC .
Interestingly, recent Fed meeting minutes showed that the heads of the Federal Reserve Banks of Cleveland, Minneapolis and St. Louis all wanted a half-point rate hike in early March before several US banks collapsed. The banking crisis had previously driven much of the narrative about rate cuts.
But the banks seem to have found some stability. And if the Fed believes the system is safe and sound, the question is whether inflation has come down enough that the organization believes it will hit the 2% target in a reasonable timeframe.
Consumer prices rose just 0.1% on a monthly basis in March, but were still up 5% year-on-year. The labor market has also remained remarkably strong.
What now
Investors appear to be reassessing inflation and interest rate expectations today, which has been a common theme in this bizarre and unprecedented tightening cycle. Several prominent bank CEOs have also said investors should brace themselves for higher interest rates longer than expected, even if they don’t necessarily materialise.
Although I believe the Fed is nearing the end of its rate hike cycle, there may be no rate cut this year and inflation may continue to recover as it has in recent months.
Despite this, I continue to like Bitcoin and Ethereum for the long term. However, Bitcoin’s new resistance level could be around $30,000 for now, which will make it harder to break through in the short-term. I still have no interest in Shiba Inu.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
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