What happened
Cryptocurrencies headed lower at the end of this week. The total value of the crypto market fell 4.8% in 24 hours and 9.3% in two days, as of 1:10 p.m. ET on Friday. Most of the major digital currencies showed similar downtrends. The 24-hour chart for Bitcoin (BTC 0.13%) pointed 4.3% lower while Ethereum (ETH 1.79%) displayed a 5.9% haircut and Solana (SOL 0.86%) suffered a 6% drop. The negative mojo also drove crypto-related stocks lower. For example, shares of the cryptocurrency trading platform operator Coinbase Global (COIN 4.03%) were down 3.2%, having recovered from an even deeper dip of 5.9% earlier in the day.
CRYPTO: BTC
Key Data Points
So what
The chief reason behind these cryptocurrency price drops is found in Ukraine, where Russian troops are gathering around the country's border and many observers fear there could be a full-scale invasion any day now. Ukraine holds a strategically important position on the map, affecting Russia's access to Mediterranean and trans-European trade routes. In particular, Ukraine's Crimean peninsula controls the flow of Russian oil and natural gas into crucial export markets. If this tension erupts into an actual invasion, the resulting effects on the global economy would be unpredictable but almost certainly not good.
On top of that high-strung situation in international politics, the U.S. government is grappling with the economic fallout from the coronavirus pandemic. Interest rates will soon show significant increases for the first time in decades, undermining the value of growth-oriented assets such as cryptocurrencies.
Image source: Getty Images.
And that's not all. The Biden administration is working up an executive order directly aimed at the cryptocurrency sector, ordering agencies such as the Department of Treasury, the Justice Department, and the Department of Homeland Security to investigate these digital assets in preparation for a firm regulatory framework. Nobody knows exactly what this executive order will look like, and it's even harder to predict its long-term effects on the crypto market.
Investors generally hate uncertainty, and there's a lot of that going around right now. That's why cryptocurrency prices and related stock charts are pointing downward right now.
NASDAQ: COIN
Key Data Points
Now what
The Ukrainian tension and the shaky economy are certainly worrisome, with the concerns running far wider than the cryptocurrency sector. A major setback in either one of these situations could trigger another global recession, weighing on everything from stocks and crypto coins to personal income rates and manufacturing activity. These downturns are bound to happen every once in a while, and the explosive mix of risk factors on the table seem to be driving the markets in that direction as we speak.
At the same time, no recession lasts forever and there will be brighter days ahead. Selling your stocks and cryptocurrencies during a downturn is an effective way to convert your paper losses into lost cash. It's better to stay calm during times of panic and take advantage of the lower prices as appropriate.
For instance, Ethereum is going through a series of technology upgrades that will put its blockchain network in a stronger competitive position for the long haul. Solana is finding more interest in its high-speed smart contracts every day, inspiring investors and developers to build non-fungible token (NFT) markets and decentralized finance applications on this platform. Bitcoin's role as a long-term value store looks more sustainable than ever, and I think we'd see digital assets playing an important role in the long-term recovery from the next worldwide economic setback. Oh, and a solid regulatory rulebook should be good news for crypto investors in the long run, even if the actual rules turn out to be heavy-handed at first. Even an imperfect attempt is better than nothing.
And of course, all of this negative attention to cryptocurrencies has the counter-intuitive effect of driving more business to the Coinbase platform. The company collects transaction fees on every sale, after all, and Coinbase doesn't actually hold a lot of digital currency on its balance sheet.
The company reports fourth-quarter results next Thursday, and I think many bearish investors will be surprised to see this business thriving while crypto prices are falling. Keep an eye on this important report next week.
