Thursday’s panic has passed and the bulls have regained control.
This week has been a volatile week for the cryptocurrency market, with most tokens going almost nowhere. Bitcoin (BTC 4.54%) is up 5.6% in the past 24 hours as of 4pm ET, but only 0.9% in the past seven days. Ethereum (ETH 2.88%) is up 3.9% in the past day, but only 1.2% in the past seven days. And meme coin Dogecoin (DOGE 4.55%) is up 6.3% today, up just 0.7% from last week.
The main reason for the fluctuations is the inflation data released on Thursday. Consumer prices rose 2.4% over the past year, while core inflation, which excludes items such as energy (which has fallen significantly recently), rose 3.3%. This raised concerns in the market that the U.S. Federal Reserve would not cut interest rates as much as expected in 2024.
Virtual currency and interest rates
Cryptocurrencies have been touted as alternative assets with no correlation to stock markets or traditional currencies, but this has not been the case for years. Cryptocurrencies, particularly Bitcoin and Ethereum, trade in correlation with growth stocks, which can move up and down dramatically depending on economic growth and the market’s view of interest rates.
That is why inflation rates are so important for cryptocurrencies. Inflation was the beginning of the Fed’s rate hike cycle in 2022, which ultimately decimated both growth stocks and cryptocurrencies. And last month, interest rates fell and we were expected to be on the other side of the cycle.
Higher-than-expected inflation readings poured cold water on that theory, especially since core inflation was much higher than the 2% the Fed wants to maintain.
On Thursday, that dynamic caused a decline in crypto markets, and Friday’s move was just a reversal of what could have been an overreaction.
Counterattack against the SEC
After receiving a Wells Notice in August advising that the SEC intended to take action against the company, Crypto.com filed suit against the SEC for exceeding its authority and failing to follow proper rulemaking procedures. I woke you up. The move follows a number of court victories for crypto exchanges, as well as blockchain and token developers.
This move is notable because the SEC’s original Wells Notice named well-known tokens such as Solana and ADA as securities.
Cryptocurrency volatility and survivability
The name of the game this week is volatility, driven primarily by similar factors that drive the stock market. However, larger trends could work against cryptocurrencies in the long term.
The development and use of blockchain primarily used stablecoins rather than cryptographic tokens to conduct transactions, which had the potential to disrupt the financial system. According to Visa’s Stablecoin Tracker, stablecoin trading volume amounted to $1.6 trillion in the past 30 days alone.
If innovation happens on the blockchain using stablecoins as a transaction medium, tokens like Bitcoin, Ethereum, and Dogecoin will become less valuable to investors. As blockchain matures, it could put pressure on the world’s most popular tokens, which have become little more than trading assets for investors these days.
Travis Hoium has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Bitcoin, Cardano, Ethereum, Solana, and Visa. The Motley Fool has a disclosure policy.
