What happened
After recovering Friday, cryptocurrencies took another dip today and continued what has been a roller coaster of a week. Recent events and market moves have led to losses and concerns about where things go from here.
Over the last 24 hours, the price of the world's largest cryptocurrency Bitcoin (BTC 1.09%) had fallen roughly 3.6% as of 11:41 a.m. ET. The prices of Shiba Inu (SHIB 0.44%) and Cardano (ADA 3.57%) were both down by nearly 10%.
So what
It has been challenging for investors to find a reason to feel bullish on the crypto market in the near term, as the Federal Reserve continues to tighten monetary policy, which includes raising interest rates and beginning to unwind its $9 trillion balance sheet. As rising rates boost the yields on safer assets and the Fed looks likely to pull a decent amount of liquidity out of the economy, riskier assets become less appealing because they demand higher returns and there could be fewer funds flowing into them in the future.
Image source: Getty Images.
Earlier this week, Fed Chairman Jerome Powell indicated that there very well could be half-point rate hikes at the Fed's upcoming meetings in June and July. With the Fed's benchmark overnight lending rate already in a range of 0.75% and 1%, two half-point hikes would up the federal funds rate to a range between 1.75% and 2%. Powell also acknowledges that it isn't going to be easy to engineer a soft landing for the economy amid such severe rate hikes.
Bitcoin, believed by some to be a hedge against inflation due to its finite supply of 21 million tokens, has not fared well in this economic environment and is down close to 40% this year. The price of bitcoin dipped below $26,000 multiple times this week. It traded below $29,000 as of this writing.
Adding to the list of issues this week was the collapse of the algorithmic stablecoin TerraUSD (USTC 2.75%), which, as a stablecoin pegged to the U.S. dollar, always wants to trade around $1. Traditional stablecoins are digital assets pegged to some kind of commodity or fiat currency, but algorithmic stablecoins rely on complex coding and minting and burning to maintain their peg. That system fell apart this week with the price of TerraUSD currently at $0.18, although it has actually rebounded over the past 24 hours.
This event really seemed to spook the entire crypto market, although perhaps investors are a little less worried since the price of most cryptocurrencies is diverging from TerraUSD today. TerraUSD also announced a recovery plan earlier this week in which it will be backed by cash reserves in the future.
In general, altcoins like Cardano and Shiba Inu seem to be following the broader crypto market, but tend to be more volatile than the likes of Bitcoin. Analysts are still quite bullish on Cardano, which is believed to have a tremendous amount of processing power on its network. However, it looks like Cardano is also collaborating on an algorithmic stablecoin. I'm not sure that's such a great idea right now given what happened this week and the lack of success among other players that have tried before.
Now what
Overall, I expect there to be lots of volatility ahead for Bitcoin and the rest of the crypto market, and I could see cryptocurrencies going lower in the near term. Long term, I am bullish on Bitcoin and broader crypto adoption. I also do see the potential for Cardano, although don't love to see it wading into the world of algorithmic stablecoins.
I view Shiba Inu as nothing more than a highly speculative bet. The coin appears to have no unique technical advantage or real-world use case, so I would stay away.
