The crypto market has taken a breather after a nice rally this year, with the price of the world's largest cryptocurrency, Bitcoin (BTC -1.82%), falling back to roughly $22,500 after briefly topping $23,000 earlier this week.
Since late afternoon yesterday, the price of the second-largest cryptocurrency, Ethereum (ETH -3.16%), traded roughly 4.5% lower as of 10:56 a.m. ET today. Meanwhile, the price of the large meme tokens Shiba Inu (SHIB -2.33%) and Dogecoin (DOGE -2.25%) traded roughly 5.6% and 5.3% lower, respectively.
There's a lot going on in crypto these days, but I think the movement of the market is mainly impacted by two things: macroeconomic factors, and the fallout of FTX and the subsequent crisis of confidence it has caused in the industry.
When FTX declared bankruptcy, it spread a lot of crypto contagion throughout the industry, since other crypto firms had exposure to the company and investors simply lost confidence after what appears to be wide-scale fraud bringing down the company.
Since then, bankruptcies and layoffs have plagued the industry. This morning, Luno, a crypto exchange based in London and owned by Digital Currency Group, announced it is laying off 35% of its work base.
But another issue that is likely more behind the rally in crypto this year and the fall today is broader economic factors, including what will happen to the economy and the trajectory of interest rates this year.
Inflation has been showing signs of cooling, which is good for crypto because it could enable the Federal Reserve to end its rate-hiking campaign sooner than later. Soaring interest rates in 2022 made riskier assets like crypto very unattractive, so the idea of the end of rate hikes has likely driven the crypto rally this year.
But the market may be getting ahead of itself, with many experts and investors projecting that the U.S. economy will tip into a recession, triggering the Fed to cut interest rates and create more of a risk-on environment for equities and crypto. But whether there will be a recession, which would set up a rate-cut scenario, is still an unknown.
Yes, most economists expect a recession, but the labor market is still quite strong, and the economy might hold up better than many expect. If this happens, there will be no rate hike and potentially higher rates for a longer period of time.
"The signals are mixed in a way that we haven't seen before," Claudia Sahm, a former Fed economist and the founder of Sahm Consulting, told Bloomberg. "People say, 'Historically when this happens, that happens, and then we go into a recession.' That's a good starting place, but that shouldn't be the end place for the analysis."
With so much uncertainty in the air regarding the economy and the trajectory of interest rates, I would expect crypto to stay volatile until there is more clarity, and it very well could dip again before finding stable footing.
I also do think the FTX situation and crypto contagion must play out before investors really feel comfortable again.
But long term, I do see a bright future for Ethereum, given its smart-contract functionality and the recent network upgrades the developers have made to the network. I still have no interest in Dogecoin and Shiba Inu, although I'll be watching to see how Shiba Inu performs once Shibarium is launched.