What happened

Cryptocurrencies continued their ascent this morning, as bond yields dropped and investors got more optimistic about the trajectory of interest rates. There has also been an apparent short squeeze this week for several prominent cryptocurrencies.

Over the last 24 hours, the prices of Bitcoin (BTC 0.94%)Ethereum (ETH 3.41%), and Dogecoin (DOGE -2.89%) had all made significant gains.

The price of Bitcoin traded roughly 6.6% higher and hovered around $20,777 as of 10:26 a.m. ET today. The price of Ethereum traded roughly 13.4% higher and the price of Dogecoin was up 10.4%.

So what

Cryptocurrencies have been crushed all year long because of the Federal Reserve's aggressive interest rate hikes, which have led to surging bond yields as well. But this week bond yields have receded some, with the yield on the 10-year U.S. Treasury bill coming down from above 4.2 percentage points earlier this week to just above 4 percentage points as of this writing.

That has buoyed stocks and cryptocurrencies, as investors get hopeful that perhaps the bulk of the Fed's rate hikes will soon be at an end. 

Green line with arrow moving up and right.

Image source: Getty Images.

But in other news, there have been reports of a big short squeeze that has driven the recent gains of Bitcoin and Ethereum. CoinDesk reported that major exchanges have seen some of the largest liquidations of short positions since the middle of 2021.

The large crypto exchange FTX reportedly saw $745 million in liquidations of short positions across all tokens on its platform over the last day, while there were $908 million of short liquidations reported on all major exchanges within the last 24 hours.

During a short squeeze, the price of a stock, or in this case a cryptocurrency, moves higher, in which investors shorting the stock either decide or are forced to cover their position by buying shares of the asset, which in turn drives the price higher. Still, not all are convinced that this will lead to a sustained rally or that the pressure on riskier assets is done just yet.

"I still remain bearish in the short term, as we still need to have more visibility on signs that indicate that inflation is cooling down," Pablo Jodar of the financial services firm GenTwo told CoinDesk.

He added: "After yesterday's Alphabet earnings release, futures are already down. I won't be surprised if bitcoin goes down back to $19,000 in the following days."

Now what

It's certainly been an interesting last few weeks for stocks and cryptocurrencies. After September inflation data came in worse than expected and did not show any signs of inflation subsiding, stocks and cryptocurrencies surprisingly moved higher. 

Perhaps investors are adapting to the current environment and becoming accustomed to the Fed's rapid interest rates, but I would also agree with Jodar that investors still need to see clearer signs of inflation peaking. Until there is proof that the pace of inflation is slowing, the Fed will have to stay aggressive.

The only good news is that based on current projections, the Fed could in theory be done with almost all of its rate hikes by the end of the year.

While the near term remains uncertain, I like Bitcoin and Ethereum long-term and still have no interest in the meme token Dogecoin due to its lack of real-world utility and the lack of technical advantages of its network.