The momentum seen in cryptocurrencies throughout the fall and early winter hit a major standstill in the past 24 hours after the Federal Reserve cut interest rates. That may sound good on the surface, but as part of the Fed's interest rate cuts, it also said it expects inflation and unemployment to rise more than expected in 2025. Add this up and investors are selling risky assets today.
Bitcoin (BTC -2.89%) The biggest drop was as of 3 p.m. ET, falling 6.2% over the past 24 hours and falling below the $100,000 level. Ethereum (Ethereum -6.09%) During that time, Dogecoin fell 9.7% to $3,350. (Doge -13.34%) fell 16.8% to $0.3032.
The Fed’s impact on cryptocurrencies
Cryptocurrencies have been on the market as a way to break out from under the traditional financial ecosystem, but the crypto market trades much like traditional risk assets such as growth stocks. In this case, as interest rates rise, growth stocks will fall, and with it, cryptocurrencies will fall as well.
The Fed said it was cutting interest rates yesterday, but the market took the inflation talk as a risk for long-term bonds, and yields rose after the announcement. According to Bloomberg, the 10-year Treasury note rose 6 basis points a day earlier and is now up 64 basis points over the past year.
As we saw in 2022, an increase in the rate means a decrease in the valuation of the cryptocurrency.
Is the FOMO cycle coming to an end?
The current move towards cryptocurrencies began when speculation mounted that President-elect Donald Trump would usher in a bull run in the crypto market after the election. That may happen, but the benefits seen did not match any fundamental changes in the industry.
Fear of missing out (FOMO) has driven up valuations, and FOMO may now be coming to an end.
There was also speculation that Bitcoin, in particular, could be purchased by the U.S. government as a reserve fund or used as a reserve fund by other governments. Federal Reserve Chairman Jerome Powell may have caused some disappointment, as he had made it clear that the Fed was not allowed to buy Bitcoin.
This is similar to the “buy the rumor, sell the news” moment in investing. It is disappointing when an obvious result or news comes out, such as the Fed not buying Bitcoin.
Questions for 2025
Last year's rally was largely based on speculation and momentum, including the approval of exchange-traded funds (ETFs) and elections. However, in 2025, these tailwinds may diminish, and the price will be driven by the number of new buyers entering the market, just like Bitcoin.
It's also worth noting that MicroStrategy is also down, making its arbitrage strategy less meaningful without a big premium. The company is also the largest individual purchaser of Bitcoin on the market, and its multibillion-dollar purchases are a driving force behind Bitcoin's price. And as Bitcoin went up, so did the cryptocurrencies, which means that today everything is going down.
Travis Hoium has a position in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
