The crypto rally we saw throughout the fall and early winter has taken a major hit in the last 24 hours after the Federal Reserve cut interest rates. That might seem like a good thing on the surface, but as part of the cut, the Fed also said it expects inflation and unemployment to rise higher than expected by 2025. Add it all up and investors are selling risk assets today.
Bitcoin (BTC -2.50%) was the biggest loser, down 6.2% over the past 24 hours as of 3 p.m. ET and falling below $100,000. Ethereum (ETH -5.50%) fell 9.7% in that time to $3,350, and Dogecoin (DOGE -9.61%) fell 16.8% to $0.3032.
The Fed's Impact on Cryptocurrencies
While cryptocurrencies are marketed as an escape from the traditional financial ecosystem, the cryptocurrency market actually trades very similarly to traditional risk assets like growth stocks. In this case, when interest rates rise, growth stocks fall, and cryptocurrencies fall with them.
I mentioned that the Fed cut interest rates yesterday, but the market sees inflation as a risk for long-term bonds, and yields on those bonds rose after the announcement. According to Bloomberg, the 10-year government bond rose 6 basis points in the past day and is now up 64 basis points over the past year.
As we saw in 2022, higher interest rates mean lower valuations for cryptocurrencies.
Is a FOMO cycle coming to an end?
The current cryptocurrency rally began after the election when speculation grew that President-elect Donald Trump would usher in a bull run for the cryptocurrency market. And that may be the case, but the gains seen are not consistent with any fundamental changes in the industry.
Fear of missing out, or FOMO, has pushed valuations up and FOMO may now be coming to an end.
There is also speculation that Bitcoin, in particular, will be purchased by the US government as a reserve or possibly used by other governments as a reserve. Fed Chairman Jerome Powell has made it clear that the Federal Reserve is not authorized to buy Bitcoin, which may cause some frustration.
This looks like a “buy the rumor, sell the news” moment in investing, where there is disappointment when results or news are released, even if it is something as obvious as the Fed not buying Bitcoin.
Questions to look forward to in 2025
Last year’s gains were largely based on speculation and momentum from items like exchange-traded fund (ETF) approvals and elections. But in 2025, there may be less momentum and prices will be driven by new buyers entering the market, like Bitcoin.
It’s also worth noting that MicroStrategy has also fallen, and its arbitrage strategy makes less sense without the big premium. The company is also the largest individual buyer of Bitcoin on the market, so its billion-dollar purchases have driven up the price of Bitcoin. And when Bitcoin goes up, so do cryptocurrencies, which means everything is down today.
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