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Central Bank Digital Currency Talk Sinks Bitcoin, Ethereum, and Solana Today

By Chris MacDonald – Jan 14, 2022 at 11:46AM

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Could central banks regulate out demand for decentralized cryptocurrencies?

What happened

Today's move in three of the top five cryptocurrencies by market capitalization represents yet another reversion downward for these top tokens. Bitcoin (BTC -4.02%)Ethereum (ETH -2.60%), and Solana (SOL -6.05%) saw declines of 2%, 2.7%, and 5.4%, respectively, over the past 24 hours, as of 10:15 a.m. ET.

These dips today cut each of these top tokens' weekly gains roughly in half. Bitcoin's gain over the past seven days comes in at 3.4%, with Ethereum and Solana following suit at 2.8% and 6.7%, respectively.

Today, it appears the Federal Reserve's recently announced look into introducing a central bank digital currency (CBDC) has crypto investors spooked. While the Fed did state that it started investigating a CBDC in July, this week Fed Chair Jerome Powell stated the finalized report should be available "within weeks." 

A proposed bill from Republican Rep. Tom Emmer is already reportedly looking to stem the amount of power the central bank would have in requiring users to set up accounts at the Fed to use a CBDC. This has led some to believe that a CBDC is around the corner, an obviously negative catalyst for the cryptocurrency market as it stands today.

Digital cryptocurrency transfers.

Image source: Getty Images.

From a token-specific standpoint, there's not much in the way of negative catalysts to consider for these top tokens. Some positive news for Bitcoin around Block's move to Bitcoin mining is being overshadowed by negative sentiment in the crypto space today. The Jack Dorsey-led company aims to provide an open Bitcoin mining system, to decentralize mining and improve the reliability and resiliency of the Bitcoin network.

Reports that Tether had frozen approximately $160 million worth of its tokens on the Etheruem blockchain in relation to a request by law enforcement appears to have the crypto market spooked.

For Solana, recent network slowdowns are a key factor investors continue to watch. However, little in the way of negative news, outside of today's macro catalyst, appears to be driving this token today.

So what

The declines among these three top tokens drove the overall crypto market lower by approximately 2.9% over the past 24 hours. This isn't necessarily surprising, considering these three tokens account for well more than half the market capitalization of the entire cryptocurrency market.

However, this news that a central bank digital currency could be around the corner is big. Investors looking to de-risk their portfolios heading into what could be a volatile catalyst appear to be looking to do so before this news comes in. 

Now what

Whether or not the Federal Reserve ultimately decides to move forward with its own cryptocurrency remains to be seen. However, the centralization of this decentralized movement is certainly a risk many investors have thought about for a long time. The extent to which conventional cryptocurrencies will thrive among a true, U.S.-dollar-backed cryptocurrency remains to be seen.

Regulatory overhang has always been a factor crypto investors have had to contend with. However, today this threat appears to be heating up. Accordingly, investors are actually seeing some divergence from equity returns today, something that hasn't been seen in some time.

Chris MacDonald owns Ethereum and Solana. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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