What happened
The price of several of the most popular cryptocurrencies fell today as investors evaluated moves by the Federal Reserve, which is desperately trying to rein in surging inflation.
The price of the world's largest cryptocurrency, Bitcoin (BTC 0.28%), has fallen roughly 3.5% over 24 hours as of 10:46 a.m. EST. Meanwhile, the price of the world's second-largest cryptocurrency, Ethereum (ETH -0.10%), has fallen 5.4%, Dogecoin (DOGE -1.08%) is down 6.8%, and Shiba Inu (SHIB -0.47%) is down roughly 6.2%.
So what
Bond yields on U.S. Treasury bills continued to tick up this morning as the market awaits minutes from the Federal Reserve's March meeting, where the Fed for the first time since 2018 increased its benchmark overnight lending rate, the federal funds rate. Those minutes are due out at 2 p.m. today. The market is currently expecting the Fed to raise its benchmark rate at each of its next six meetings this year.
In the Fed's minutes, investors, analysts, and investors will also be looking for hints at how aggressively the Fed plans to shrink its balance sheet, which has ballooned to close to $9 trillion.
Image source: Getty Images.
Yesterday, the market sold off after Fed governor Lael Brainard said publicly that the Fed needs to move fast on balance sheet reduction, which would effectively remove liquidity from markets. The statements came as a surprise because Brainard normally favors a low federal funds rate and loose Fed policy.
"The [Federal Open Market Committee] will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting," said Brainard.
She added, "Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19."
The broader crypto market had been rallying last week, and many see Bitcoin as a hedge against inflation, but since last October cryptocurrencies have not fared well amid a hawkish Fed. This may in part be because surging inflation, a higher cost of debt, and removing liquidity from the market simply leave investors less money for highly speculative investments like cryptocurrencies.
Now what
Cryptocurrencies are all quite volatile, as evidenced in recent years and weeks. While I don't know if Bitcoin is truly a hedge against inflation, I generally like Bitcoin and Ethereum in the long term. Bitcoin is the pioneer of cryptocurrencies, which continue to get more and more ingrained into the financial system every day.
Ethereum is essentially the pioneer for smart contract capabilities and decentralized applications. Furthermore, the network has been in the midst of a massive set of upgrades over the last two years, which are supposed to make the network more scalable and secure. The official transition to the new network is scheduled for this year, an event that analysts say could lead to a rally for Ethereum.
I've never really been a fan of Dogecoin or Shiba Inu because they don't seem to have any kind of unique competitive advantage among the thousands of cryptocurrencies in existence. However, there is no denying the innate interest in these two cryptocurrencies, so they tend to move up and down with the broader crypto markets.
