What happened
Cryptocurrencies are down across the market today and altcoins are taking the brunt of the drop. Smaller cryptocurrencies are typically more volatile than their larger rivals, and that can lead to some big moves.
As of 3:20 p.m. ET, in the last 24 hours Cardano (ADA -3.17%) was down as much as 3.6%, Polkadot (DOT -4.24%) fell as much as 7.3%, and Crypto.com Coin (CRO -2.27%) dropped 5.5%. Over the last week, these cryptocurrencies are down 5.8%, up 0.6%, and down 7.4%, respectively.
Image source: Getty Images.
So what
The Federal Reserve was the talk of the market over the last 24 hours, after indicating it may raise rates "sooner or at a faster pace than participants had earlier anticipated." March has been considered a likely time that short-term rates will start to go up and the market is worried it might be even sooner.
Fed officials also talked about reducing its balance sheet in 2022, which would mean dramatically pulling back on bond buying that it's been doing in both the Treasury market and the corporate bond market. This is what's known as quantitative easing and it's helped keep interest rates low for much of the last decade.
These aren't entirely surprising things to hear about, but the market had held out hope in recent weeks that the stimulus and low rates would maintain for a little longer. The Fed seems to be looking at pulling back these policies even sooner now.
How does crypto get tied up in these moves? The reality is that cryptocurrencies trade with growth stocks right now, so when news hits the market that hurts growth stocks, crypto typically falls with it. This is often known as a "risk-off" trade, where riskier assets are sold in favor of "safer" assets, and that dynamic hurt crypto today.
Now what
Cryptocurrencies are typically volatile, but the last 36 hours have been unusually choppy for crypto markets. Many cryptocurrencies have dropped over 10% and they don't seem to be recovering very quickly. This could be part of a long-term trend in the market away from risky assets like growth stocks and cryptocurrencies, which is slowly dragging on prices.
With altcoins Cardano, Polkadot, and Crypto.com Coin specifically, I would be more concerned about their ecosystems being built out long term. They're all trying to attract users and developers in an effort to build an ecosystem of decentralized finance, NFTs, marketplaces, and other apps on their blockchains. It's this development that will ultimately drive value to investors long term, and the Federal Reserve or a sell-off in growth stocks won't stop that innovation.
I think today's volatility should be ignored for the long-term growth picture in the cryptocurrency space. We're seeing improved utility and applications being built, and that will unlock a lot of value for long-term investors.
