What happened
Three of the top five cryptocurrencies in the world, Bitcoin (CRYPTO:BTC), Ethereum (CRYPTO:ETH), and Solana (CRYPTO:SOL), each saw dramatic declines, once again, today. These top tokens had sunk by 2.7%, 4.7%, and 4.3%, respectively, over the past 24 hours, as of 9 a.m. ET.
Market-specific drivers, such as the potential for a reduction in monetary stimulus sooner than expected, appears to be the key driver behind the continued selling pressure we’ve seen among these large-cap cryptocurrencies today. Some token-specific catalysts appear to be at play as well. Solana’s recent decline has been tied to slowing transaction speeds as a result of a new non-fungible token (NFT) project launch on Monday.
Image source: Getty Images.
So what
Some experts suggest that a more hawkish tone from central banks in the U.S. and around the world could prove to be detrimental for top cryptocurrencies, and digital assets in general. The thinking goes that as less cheap money flows around, and higher-yield opportunities become available in the fixed-income world, highly speculative risk assets will see reduced demand.
That said, the same factors that drive this monetary policy (namely, inflation) should theoretically be positive for major cryptocurrencies like Bitcoin and Ethereum. As stores of value outside the stock market, some have come to view these mega-cap tokens as market hedges during times of uncertainty. Indeed, now appears to be a rather uncertain time, with valuations across many high-flying sectors being hit by concerns of inflation-led growth reductions. For cryptocurrencies, a weaker U.S. dollar resulting from this inflation should (again, in theory) boost the value of cryptocurrencies on a relative basis (it will take more dollars to buy a single bitcoin, for example).
Now what
Whether these top tokens are more similar to highly speculative risk assets or more akin to market hedges is a truly intriguing debate. In my view, cryptocurrencies encompass some resemblance of both.
That said, the market appears to be focusing on the high-volatility/high-risk nature of the crypto sector right now. Any asset with the potential to correct materially is being pushed aside in favor of more defensive assets. That makes sense, given the uncertainty in the market right now.
The bottom line is there’s likely more volatility on the horizon. Long-term investors taking a multi-year, or decade-plus, long view of this sector need not worry. This volatility is likely “normal,” or at least in line with historical precedent. However, traders and those with shorter investment time horizons may want to consider what this volatility could mean in the short term. Things are certainly starting to look ugly in the crypto world right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.