What happened
The value of cryptocurrencies continued to spike on Thursday morning, following a trend that began Wednesday after the Federal Reserve announced it will end some of its asset purchases and boost the fed funds rate several times in 2022.
Bitcoin (BTC 0.07%) was up by much as 5.1% over the last 24 hours, Ethereum (ETH 0.05%) rose 10.4%, Dogecoin (DOGE +1.74%) popped 6.5%, and Solana (SOL 0.94%) led the way by climbing 13.7%. Those pops had faded slightly by midday, when the tokens' values were up by 2.1%, 8.4%, 1.3%, and 9.6%, respectively.
So what
Crypto values started rising around midday on Wednesday when the Federal Reserve announced that it will scale back more rapidly on the bond-buying program that it put in place early in the pandemic. The central bank's bond purchases helped keep interest rates low and the economy moving, but with economic activity picking up steam, unemployment falling, and inflation surging, that stimulus is not needed, according to the Federal Reserve. The bond-buying will now wind down in March.
Image source: Getty Images.
We could also see interest rates start to increase with officials expecting around three 25-basis-point hikes in the benchmark fed funds rate next year. Bond markets have been pricing in the expectation of higher interest rates for months, but the official acknowledgment by the Federal Open Market Committee (FOMC) that interest rate hikes may be needed to combat inflation is still a big deal.
Notably, the FOMC increased its forecast for 2022 inflation from 2.2% to 2.6%, and it stopped describing the current inflation surge as "transitory."
As this news was being digested by the broader market, a $150 million investment in blockchain gaming was announced by Solana Ventures, the venture capital firm Griffin Gaming Partners, and gaming platform company Forte. The funds are intended to be used for growing the number of decentralized games built on the network, which primarily use non-fungible tokens (NFTs) to authenticate digital items.
While blockchain-based games are still a relatively new innovation, they could be a great use case for cryptocurrencies and NFTs, and the Solana network is an ideal platform to build them on because of its low fees. This is the kind of utility the bullish crypto investors have been dreaming of.
It's also worth noting that with the holidays coming up, there's a lot of buzz about gifting cryptocurrency and NFTs. To that end, Robinhood (HOOD 3.11%) announced a crypto gifting feature in its app. This may not sound like a big deal, but according to a survey by BlockFi, 1 in 10 Americans are planning to give the gift of crypto this year, so there could be significant incremental holiday demand.
Now what
Investors' reactions to inflation and interest rate news have been a little odd lately, and the crypto response on Thursday was no different. Cryptocurrencies are often touted as a hedge against inflation, so if the Federal Reserve is about to raise rates to combat inflation, that might be viewed as bad news for token values. But traders didn't see it that way.
Cryptocurrency markets are generally volatile, but in the last few weeks, that has been taken to an extreme. What I would focus more on than the latest short-term move is the utility being built by crypto companies. Robinhood's crypto-gifting feature is an example of that, as are the Solana games. As their utility grows, the value of cryptocurrencies could rise, which is why I'm still bullish on these volatile assets over the long term.
