What happened
Shares of several cryptocurrencies moved lower today for no obvious reason. But the drive does seem tied to macro issues as investors continue to grapple with the market's direction.
Since late yesterday afternoon, the price of the world's largest cryptocurrency, Bitcoin (BTC 1.08%), traded 3.4% lower, and it hovered around $29,236 as of 9:43 a.m. ET today. Meanwhile, the price of the world's second-largest cryptocurrency, Ethereum (ETH 1.37%), traded 5.1% lower, while meme token Shiba Inu (SHIB 3.86%) traded 4.8% lower.
So what
Bitcoin has been on a great run and is now up 76% this year. A lot of this gain appears to have been driven by macro issues such as expectations that interest rate hikes will soon end, a weakening U.S. dollar, and struggles in the mainstream banking system.
Image source: Getty Images.
But now, the banking system -- to which Bitcoin, cryptocurrencies, and blockchain were created as an alternative -- has shown signs of stabilizing. Furthermore, the end of interest rate hikes at the Federal Reserve's May meeting now seems unlikely. More than 88% of traders are betting on a quarter-point hike next month, which is significantly higher than what we've seen in past weeks.
There is also a lot of debate over the path of interest rates. While the market expects interest rate cuts this year, some still wonder if this narrative will actually play out.
"There have been some signs the Fed could be more aggressive towards higher interest rate policy than what the market is pricing, which has been driving yield differentials in the U.S. dollar's favor, while weighing on sentiment," LMAX market strategist Joel Kruger said, according to CNBC.
Interestingly, recent meeting minutes from the Fed showed that the board of directors at the Federal Reserve Banks of Cleveland, Minneapolis, and St. Louis all wanted a half-point interest rate hike in early March before the collapse of several U.S. banks. The banking crisis had previously been driving a lot of the narrative about rate cuts.
But banks seem to have found some stability. And if the Fed believes the system is safe and sound, the question then becomes whether inflation has receded enough for the organization to believe it will reach the 2% target in an appropriate time frame.
Consumer prices rose only 0.1% in March on a monthly basis but were still up 5% year over year. The labor market has remained remarkably strong as well.
Now what
Investors today seem to be reassessing their expectations for inflation and interest rates, which has been a common theme in this bizarre and unprecedented tightening cycle. Several prominent bank CEOs have also said that investors should be prepared for higher rates for longer than they might expect, even if they won't necessarily come to fruition.
While I do believe the Fed is nearing the end of its rate-hiking cycle, a rate cut might not materialize this year, and inflation could continue to bounce around as it has done in recent months.
That said, I continue to like Bitcoin and Ethereum for the long term. However, Bitcoin's new resistance level might be around $30,000 for the time being, which will make it more challenging to break through on a near-term basis. I still have no interest in Shiba Inu.
