What happened
The cryptocurrency market has been somewhat precarious in recent weeks, with bouts of volatility resulting in surprise rallies and dips. Today, this volatility has once again materialized, this time to the downside. Top tokens Bitcoin ( BTC 0.56% ), Ethereum ( ETH 0.77% ), and Dogecoin ( DOGE 0.53% ) have sunk 1.9%, 1.7%, and 4.6%, respectively, over the past 24 hours as of 12:15 p.m. ET.
These moves come amid the typically bullish Bitcoin conference held in Miami. Other metrics such as trading volumes and buying activity remain strong, particularly for Bitcoin and Ethereum.
Image source: Getty Images.
That said, investors appear to be reconsidering, once again, the extent to which higher-risk assets such as digital tokens fit within their given risk parameters. Yesterday’s release of the minutes from the Federal Open Market Committee meeting in March signaled that aggressive rate hikes could make cheap capital a thing of the past. Right now, investors attempting to digest what this means for the crypto market appear to be taking a rather bearish view of the current situation.
For more speculative meme tokens such as Dogecoin, today’s underperformance may not be surprising in this light.
So what
Both equity and crypto investors appear to be taking the view that the aggressive interest rate hikes that may have been priced into the market may not be fully reflecting the extent to which central banks may choose to hike. A reduction of liquidity across the board could hurt asset prices broadly. However, for assets that are more difficult to value or are based more on momentum (such as cryptocurrencies), the effects of this removal of accommodative policy could be very detrimental. At least, that’s what the market appears to be pricing in today.
Now what
With cryptocurrencies moving in closer correlation to equities in recent months, many investors have simply come to the conclusion that Bitcoin, Ethereum, and even more speculative tokens like Dogecoin may represent higher-beta-risk assets. In an environment of tightening monetary policy, it’s becoming clearer that the risk profile of these investments may not fully reflect this new status quo.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
