What happened
In yet another high-correlation day between cryptocurrencies and their equity counterparts, losses are being seen across the board. As of noon ET, the overall crypto market is down roughly 2%, outpacing aggregate losses seen in most equity indices today. However, certain large-cap tokens are worth pointing out as today’s underperformers. Dogecoin (DOGE -1.49%), Polkadot (DOT -5.19%), and Chainlink (LINK -4.04%) saw 24-hour declines of 3.2%, 4.2%, and 3.8%, respectively, outpacing the declines seen in the broader market.
A portion of this move can be attributed to the violent upward swing these three tokens (and the broader crypto market, for that matter) have seen in recent weeks. Dogecoin is still up more than 20%, surging on yet another favorable tweet from Elon Musk. Polkadot’s 45% year-to-date move has been driven by numerous factors, including an intriguing analysis by parent company Web3 Foundation, which asserts DOT is not a security. And Chainlink has seen strong support from crypto analysts, tied to broader blockchain development metrics and leading to a 26% year-to-date increase.
Accordingly, today’s move lower appears to be the result of a broader decline in sentiment, which is being felt more by higher-risk assets today. Ahead of the highly awaited upcoming FOMC meeting, investors are bracing for what could be a more hawkish stance from the Federal Reserve relative to other central banks.
So what
What’s growing increasingly clear for crypto investors as well as those more inclined to focus on hypergrowth stocks is that the moves seen in these more speculative asset classes are increasingly being driven by macro catalysts. When the Federal Reserve hikes rates aggressively and signals its intent to make money more expensive for longer, that’s not great for assets that are viewed as beneficiaries of cheap money policies that have driven valuation expansion over the past decade.
Simply put, as interest rates rise, so do borrowing costs for speculators. And with significant leverage in the crypto ecosystem, a less desirable fiat lending environment is clearly less bullish for assets such as cryptos.
That said, if the Federal Reserve makes like the Bank of Canada and hikes by 25 basis points (0.25%) while signaling a pause, perhaps it’s party time. Thus, this week is proving to be a key inflection point for investors, who appear to remain uncertain with respect to Chairman Jerome Powell’s commentary.
Now what
If a smaller rate hike is accompanied by signals that a pause (or preferably cuts) could be on the horizon, it’s likely game on again for this asset class. Indeed, it appears investors have already priced in a significant amount of anticipation that something positive is likely to materialize this week. Thus, perhaps today’s sectorwide decline is indicative of investors taking some profits off while waiting for the final verdict before jumping in.
This week will likely prove to be a volatile one in the crypto world. It’s interesting to see how crypto investors are pricing uncertainty, and today, it is being reflected in some relatively strong selling pressure.
Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ChainLink. The Motley Fool has a disclosure policy.