What happened
Shares of most cryptocurrencies fell over the weekend as digital assets and stocks prepare for what could be a turbulent week, with the Federal Reserve set to hold its July meeting, another big interest rate hike in store, and more important economic data due out later this week.
Over the last 24 hours, the price of the world's largest cryptocurrency, Bitcoin (BTC 0.27%), had fallen about 2.6% as of 9:13 a.m. ET Monday. The price of Ethereum (ETH -0.28%) was down more than 3%, and the meme token Shiba Inu (SHIB -0.74%) had fallen 3.5%.
So what
Like many tech stocks and riskier assets this year, crypto prices have taken a beating as inflation has soared this year and the Federal Reserve has rapidly increased its benchmark overnight lending rate, the federal funds rate. Riskier assets typically do not fare well in the face of rising interest rates because the yields on safer assets rise, demanding more from the earnings and returns of growth assets, which previously traded at premium valuations.
On Wednesday, the Fed's rate-setting committee is widely expected to raise the federal funds rate by another 75 basis points (0.75%), but investors will be looking for clues in the Fed's comments about how the Fed views the economy and future rate hikes for the rest of the year. A more hawkish Fed would likely spell trouble for the stock market and crypto prices. However, if the Fed feels more comfortable about the state of inflation and future economic prospects, asset prices might respond favorably.
"However this week plays out, I suspect today will be the most sedate day of the week to come [for crypto]," Oanda analyst Jeffrey Halley wrote in a recent research note.
Along with more earnings reports, another big event that could impact crypto and broader market activity will occur on Thursday, when the U.S. Bureau of Economic Analysis releases its estimate for gross domestic product (GDP) growth for the second quarter of the year.
In the first quarter of the year, U.S. GDP fell by 1.6% after growing nearly 7% in the fourth quarter of 2021. Two straight quarters of negative GDP growth technically signals a recession. Goldman Sachs earlier this month trimmed its GDP estimates for Q2 to roughly 0.7%, which would keep the U.S. just barely out of a technical recession.
With a strong labor market and most large U.S. banks reporting strong consumer spending in Q2, it doesn't really feel like the U.S. economy tipped into a recession, but the market may see the slowdown as just beginning, which may not be so favorable for riskier assets like cryptocurrencies.
Now what
In the near term, I could see crypto prices going in either direction. A less hawkish Fed and better-than-expected GDP growth in Q2 could signal to the market that the Fed might be able to tame inflation and engineer a softer landing than many have envisioned in recent months.
That would likely bode well for crypto prices. But more hawkish comments and weak economic data may result in movement downward.
Either way, I still view Bitcoin and Ethereum as good long-term investments given their growing adoption all over the world and real-world use cases. Shiba Inu does not appear to have any technical or fundamental investment thesis, which is why I would avoid the meme token.
