What happened
Several of the largest cryptocurrencies have jumped higher today as investors digest monetary policy and also monitor the foreign exchange markets, which have been active lately.
Over the last 24 hours, the price of the world's largest cryptocurrency, Bitcoin (BTC 1.63%), has traded roughly 5% higher as of 10:27 a.m ET. The price of the world's second-largest cryptocurrency, Ethereum (ETH 2.18%), traded roughly 4.1% higher, and the price of Solana (SOL 3.95%) was up 5%.
So what
Cryptocurrencies have struggled as the Federal Reserve has raised its benchmark overnight lending rate, the federal funds rate, aggressively this year, making riskier assets like cryptocurrencies less appealing. The Fed did a 0.75% rate hike at each of its June, July, and September meetings, and the Fed's median forecast shows that another jumbo 0.75% hike could happen before the year is over.
Image source: Getty Images.
But recently, the price of Bitcoin has split off from those of other cryptocurrencies and tech stocks. For much of the year, the two have traded similarly. However, over the last five days, the price of Bitcoin, which is back above $20,200, has risen about 5%, and the Nasdaq Composite has fallen about 4.6%.
Analysts seem to think that crypto investors are now turning their attention to the foreign exchange markets, which have been dominated by an incredibly strong U.S. dollar, which not too long ago overtook the euro. The U.S. dollar has also overtaken the British pound sterling, which has hit a record low.
A strong dollar has contributed to Bitcoin's struggles this year because cryptocurrency is an alternative to traditional currencies and therefore moves inversely to the dollar. Vijay Ayyar of the international crypto exchange Luno said he thinks the dollar index, which measures the U.S. dollar against other currencies and has risen 18% this year, could be nearing its peak.
"Traders hence might also be positioning themselves accordingly," said Ayyar.
Cathie Wood, the founder and CEO of Ark Investment Management and a heavy tech investor, also believes the strengthening U.S. dollar could result in a shift in monetary policy.
CRYPTO: BTC
Key Data Points
"Japan's and China's dollar sales could be the first sign that 'monetary easing' is on the way," Wood said in a tweet yesterday. "The dollar's parabolic move has been devastating to the rest of the world and should come back to bite US competitiveness, jobs, and economic activity, forcing the Fed to pivot."
If the Fed stops raising rates or even moves to cut rates sooner than expected, that would likely benefit risk assets like cryptocurrencies.
Now what
It's interesting to finally see Bitcoin and other cryptocurrencies moving in a different direction from tech stocks and for a reason other than rates. It's certainly a new dimension that could potentially help end the crypto winter.
But I would caution investors not to get too upbeat just yet, as the action this morning could simply be investors taking a break from the intense selling that has happened of late. More rate hikes are also still a possibility and could continue to pressure the crypto market.
That said, I like Bitcoin and Ethereum for the long term and think they are good buys at this level if you are willing to deal with some volatility. Solana is worth consideration as well, but right now I am really interested only in the main cryptocurrencies like Bitcoin and Ethereum.
