What happened

Today's price action across the broader cryptocurrency market hasn't been pleasant. Led by Bitcoin (BTC -3.53%), Solana (SOL -5.24%) and Avalanche (AVAX -4.85%), the overall market has sunk more than 4.1% over the past 24 hours, as of 3:30 p.m. ET on Thursday.

Bitcoin's 24-hour dip (unsurprisingly) matched the market, at a 4.1% decline. However, Solana and Avalanche saw more significant losses today, sinking 6.9% and 7.5%, respectively, over the same time frame. 

This decline is notable because it's one of the first such down days we've had thus far in 2023. Accordingly, with Bitcoin now trading around $22,000 at the time of this writing, it's clear investors are spooked by various sector-specific headwinds. Today, the cause for uncertainty appears to be increasing scrutiny from U.S. regulators.

An announced investigation into high-profile crypto exchange Kraken, as well as commentary from Coinbase CEO Brian Armstrong that regulators might be diving into staking next, have some in the crypto community concerned.

And a rumor that a settlement is on the table for XRP in its long-running trial with the Securities and Exchange Commission over whether or not its token represents a security could be another layer of regulatory risk, depending on what the details of such a settlement are.

So what

It's been a while since the crypto community has found regulatory issues to be concerned about. In many respects, the sector-specific risks that were highlighted so deftly by critics last year have been silenced by the rather loud performance shown by top cryptos this year.

Accordingly, following a year in which almost no positive catalysts were being priced in, this year's performance appears to be quite the opposite, with investors clearly choosing to politely ignore various headwinds that remain.

The extent to which this rally can continue in large-cap tokens Bitcoin, Solana, and Avalanche depends on many factors. The macroeconomic environment, which has cooperated with most high-risk assets this year, will need to remain robust.

These particularly projects will need to continue to see growth materialize at their network levels. And sector-specific issues such as regulation will need to be sorted out in short order.

Now what

Every incredible market surge inevitably has some sort of cooling-off period before heading higher. For bulls expecting that this year's rally will continue, that's the narrative that many are hoping will play out.

I have no idea which direction the crypto market will head this year. Right now, this rally in risk assets is welcome for long-term investors. But as we saw with rallies last year, getting too comfortable can be dangerous in this high-risk space.