After recovering on Friday, cryptocurrencies plunged again today and continued what has been a week-long rollercoaster ride. Recent events and market movements have led to losses and concerns about what’s next.
Over the past 24 hours, the price of the world’s largest cryptocurrency Bitcoin (CRYPTO: BTC) had fallen about 3.6% as of 11:41 a.m. ET. The prices of shiba inus (CRYPTO: SHIB) and gimbal (CRYPTO:ADA) were both down almost 10%.
It has been difficult for investors to find any reason to feel bullish in the near-term crypto market as the Federal Reserve continues to tighten monetary policy, which includes raising interest rates and the start of unwinding of its $9 trillion balance sheet. As rising rates increase yields on safer assets and the Fed looks likely to take a decent amount of cash out of the economy, riskier assets are becoming less attractive as they demand higher returns and there could be fewer funds flowing into it in the future.
Earlier this week, Fed Chairman Jerome Powell indicated that there could very well be half-point rate hikes at upcoming Fed meetings in June and July. With the Fed’s benchmark overnight lending rate already in a range of 0.75% to 1%, two half-point hikes would push the federal funds rate up to a range between 1. 75% and 2%. Powell also acknowledges that arranging a soft landing for the economy amid such severe rate hikes will not be easy.
Bitcoin, seen by some as an inflation hedge due to its limited supply of 21 million tokens, has not held up well in this economic environment and is down almost 40% this year. Bitcoin price has fallen below $26,000 multiple times this week. It was trading below $29,000 at the time of this writing.
The collapse of the algorithmic stablecoin added to the list of problems this week TerraUSD (CRYPTO:UST), which, as a stablecoin pegged to the US dollar, always wants to trade around $1. Traditional stablecoins are digital assets tied to some sort of commodity or fiat currency, but algorithmic stablecoins rely on complex coding, as well as minting and engraving to maintain their peg. This system broke down this week with the price of TerraUSD currently at $0.18, although it has actually rallied in the last 24 hours.
This event really seemed to scare the whole crypto market, although investors may be a little less worried since the price of most cryptocurrencies diverges from TerraUSD today. TerraUSD also announced a stimulus package earlier this week in which it will be backed by cash reserves going forward.
In general, altcoins like Cardano and Shiba Inu seem to follow the broader crypto market, but tend to be more volatile than the likes of Bitcoin. Analysts are still quite bullish on Cardano, which is said to have huge processing power on its network. However, it looks like Cardano is also collaborating on an algorithmic stablecoin. I’m not sure it’s such a good idea right now considering what’s happened this week and the lack of success from other players who have already tried.
All in all, I expect a lot of volatility ahead for Bitcoin and the rest of the crypto market, and I could see cryptocurrencies going down in the near term. Long-term, I’m bullish on Bitcoin and broader crypto adoption. I also see the potential of Cardano, although I don’t like to see it wade into the world of algorithmic stablecoins.
I view Shiba Inu as nothing more than a highly speculative bet. The coin appears to have no unique technical advantages or real-world use cases, so I would stay away.
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Bram Berkowitz has positions in Bitcoin. The Motley Fool has posts and recommends Bitcoin. The Motley Fool has a disclosure policy.
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