What happened
After rising over the weekend, the crypto sector relinquished those gains as volatility and a lack of direction linger in the market.
Over the last 24 hours, the price of the world's largest cryptocurrency, Bitcoin (BTC 0.52%), had declined by 6% as of 9:30 a.m. ET today. The price of the world's second-largest cryptocurrency, Ethereum (ETH 4.15%), traded more than 8% lower, while the price of Solana (SOL 1.88%) had fallen more than 12%.
So what
Yesterday, analysts warned that they didn't see the price of Bitcoin reaching a bottom that day and that more selling could be ahead, which seems to have gotten the attention of the market today. The price of Bitcoin hovered around $29,625 as of this writing.
Image source: Getty Images.
The market is still expecting the Fed to raise its benchmark overnight lending rate, the federal funds rate, at all of its remaining meetings this year, including three half-point hikes. In addition, the Fed has begun the process of quantitative tightening, in which it will allow bonds to run off its balance sheet. By September, the Fed is expected to be reducing its bond holdings by $95 billion per month.
Unless it's been fully priced in, all of this could continue to put pressure on risky assets like Bitcoin and other cryptocurrencies, because the yield on safer assets will increase, and there could be fewer funds flowing into riskier assets.
In a research note this morning, analysts at Morgan Stanley wrote that the weakness they are seeing in the broader crypto market could be the "crypto equivalent of quantitative tightening, as total stablecoin market cap falls, and liquidity on decentralized exchanges and leverage on lending platforms falls even faster."
"This market is languishing," Adam Farthing and Collin Howe of the crypto firm B2C2 wrote in a research note. "Without a catalyst to the upside, current sentiment is likely to keep prices rangebound, with some clear and immediate risk of a break lower."
Solana has struggled more than Bitcoin and Ethereum recently and is down close to 15% over the past week. Altcoins tend to be more volatile than Bitcoin and Ethereum, but Solana has also been dealing with network issues that have caused five outages this year alone. The most recent outage on Solana's network occurred on June 1, in which the network stopped generating new blocks for roughly 4.5 hours. Developers have since corrected the issue.
Now what
I am overall bullish on Bitcoin and Ethereum and even think altcoins like Solana that have superior technical capabilities could be good long-term investments. Solana is a network that can solve some of the issues that have prevented blockchain networks from scaling because it can process lots of transactions per second at very affordable levels.
But that doesn't mean we've seen a bottom in the crypto market yet. As I mentioned above, we're still expecting many rate hikes and lots of uncertainty when it comes to the economy and the impact quantitative tightening will have on the broader markets.
This year, cryptocurrencies have largely traded like growth and tech stocks and experienced a major sell-off. Until we can get past some of the upcoming broader economic and monetary events as well as all of the uncertainty, I think crypto investors should brace for a bumpy ride.
