The crypto momentum we saw all fall and early winter hit a big problem in the last 24 hours after the Federal Reserve cut interest rates. This may seem like a good thing on the surface, but as part of these cuts, the Fed has also said it expects inflation and unemployment to rise more than expected in 2025. Adding that up, the Investors are now selling risky assets.
Bitcoin (BTC -1.79%) is the biggest loser, falling 6.2% in the last 24 hours as of 3 p.m. ET and falling below the $100,000 level. Ethereum (ETH -1.27%) is down 9.7% during this period to $3,350 and Dogecoin (DOGE -2.77%) is down 16.8% at $0.3032.
The Fed’s impact on crypto
Even though cryptocurrencies have been marketed as a way out of the traditional financial ecosystem, the cryptocurrency market trades much like traditional risk assets like growth stocks. In this case, when interest rates rise, growth stocks fall and crypto falls with them.
I mentioned that the Fed cut rates yesterday, but the market took the inflation talk as a risk for long-term bonds, and those yields rose after the announcement. According to Bloomberg, 10-year government bonds rose 6 basis points over the past day and are now up 64 basis points over the past year.
As we have seen in 2022, higher rates mean lower valuations for cryptocurrencies.
A FOMO cycle coming to an end?
This current crypto run began after the election, when there was an increase in speculation that President-elect Donald Trump would usher in a bull run for the crypto market. And it can happen, but the gains seen don’t correspond to any fundamental change in the industry.
Fear of missing out, or FOMO, has driven up valuations and that FOMO may now be coming to an end.
There was also speculation that Bitcoin, in particular, would be purchased by the US government as a reserve or could be used as a reserve by other governments. Fed Chairman Jerome Powell made it clear that the Federal Reserve was not authorized to purchase Bitcoin, which could have caused some disappointment.
This feels like a “buy the rumor, sell the news” investing moment, where there is disappointment when earnings or news are released, or even something as obvious as the Fed not buying Bitcoin.
Questions for 2025
Last year’s gains were based largely on speculation and momentum from factors such as the approval of exchange-traded funds (ETFs) and elections. But in 2025, these tailwinds could be fewer and prices depend on the number of new buyers entering the market, like Bitcoin.
It should also be noted that MicroStrategy has also fallen and its arbitrage strategy makes less sense without a big premium. He is also the largest individual buyer of Bitcoin in the market, so his multibillion-dollar purchases have been a driver of the Bitcoin price. And as Bitcoin scales, so does crypto, which means everything is lower today.
Travis Hoium holds positions in Ethereum. The Motley Fool posts and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
