Why Bitcoin, Ethereum, and Dogecoin Are Falling Today

What happened

Many cryptocurrencies fell along with stocks today, as investors continued to weigh the macro outlook and how hawkish the Federal Reserve will continue to be this year and into 2023.

Over the past 24 hours, the price of the world’s largest cryptocurrency, Bitcoin (BTC -2.06%), had fallen 0.7% as of 3:23 p.m. ET today. The price of the world’s second-largest cryptocurrency, Ethereum (ETH -1.03%), traded 1% lower, and the price of the meme token Dogecoin (DOGE -3.27%) was down 1.6%.

So what

Markets have been struggling since Federal Reserve Chairman Jerome Powell took center stage on Friday at the Fed’s annual Jackson Hole Economic Symposium and essentially told the market that the Fed had more work to do to rein in high levels of inflation. Investors took the information to mean that the Fed would continue to raise interest rates until it saw further evidence that inflation was on the decline.

Image source: Getty Images.

John Williams, president of the Federal Reserve Bank of New York, continued this sentiment today with his comments in a Wall Street Journal article.

“I do think with demand far exceeding supply, we do need to get real interest rates … above zero. We need to have somewhat restrictive policy to slow demand, and we’re not there yet,” he said, adding, “We’re still quite a ways from that.”

The longer the Fed raises rates, the tougher it could be for growth stocks and other risk assets such as cryptocurrencies, because rising rates tend to make safer assets more appealing and bring down the valuations of growth and risk assets. Given that Bitcoin and the crypto market went on a huge run in 2021 and that they are pretty hard to truly value, high rates have crushed the crypto market and the price of Bitcoin is down more than 58% this year.

The other issue crypto investors may want to consider is that the Fed will also ramp up quantitative tightening (QT) in September, in which the Fed allows its massive balance sheet to start winding down, which effectively pulls liquidity from the economy. This may reduce the amount of funds flowing into riskier assets like crypto.

After starting gradually over the past few months, the Fed in September will allow roughly $60 billion of U.S. Treasury bills and $35 billion of mortgage-backed securities to mature each month without reinvesting, which will gradually reduce its balance sheet.

“I don’t think there is appreciation for QT, by markets or the Fed,” said Solomon Tadesse, head of North American quantitative equities strategy at Societe Generale. “In the end, if QE [quantitative easing] mattered, so will QT. It might not be totally symmetrical, but there will be a meaningful impact.”

Now what

Crypto is taking a hit along with stocks today, as the market continues to try and find clarity regarding inflation, which will influence the Fed’s road map for rate hikes. Unfortunately, it’s a bit of a wait-and-see game right now until there is more evidence that inflation has peaked and started to decline.

The next bit of data that could provide evidence of this is the Consumer Price Index reading in early September.

Ultimately, I still like Bitcoin and Ethereum long term, given their growing adoption and real-world use cases. I would avoid Dogecoin as I don’t think it has a technical advantage or any real-world utility.

Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.