The irony of the crypto market is how much it can fall when the economy is doing well. Several key economic indicators beat expectations on Tuesday. Bitcoin (Cryptocurrency: BTC) Cryptocurrencies such as have fallen on the news.
As of 4:30 p.m. ET, Bitcoin was down 4.9% over the past 24 hours. Ethereum (Crypto: ETH) It fell by 7.4%. dogecoin (Code:Doge) It fell 8.9%. Momentum appears to be putting further downward pressure on the market, and the decline could worsen as the US stock market closes.
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Good for the economy but bad for virtual currency
The ISM Services PMI, which measures services, their orders, backlog, business activity and other items, rose to 54.1 in December from 52.1 in November. This was a bullish number for the economy, as a reading above 50 indicates economic expansion.
Another indicator was the Bureau of Labor Statistics' job openings, which rose by 7.8 million to 8.1 million, higher than economists' expectations of 7.7 million.
These are all positive economic indicators, but they also come with warnings that businesses are worried about rising costs and inflation. Therefore, if the Fed's easing stance weakens and inflation accelerates in 2025, there is a possibility of interest rate hikes.
Cryptocurrencies, particularly meme coins such as Bitcoin and Dogecoin, trade highly correlated with risk assets such as growth stocks. When investors speculate that interest rates will rise, the value of these assets will fall. No wonder growth stocks also fell today.
Bitcoin and virtual currency caught me by surprise
Cryptocurrency investors proved unprepared for the better-than-expected news, with $457 million of long positions liquidated as the value fell. Cryptocurrency trading is often highly leveraged, and when that leverage is released as the value rises or falls, it can cause an amplification of the underlying market trend.
Bitcoin has not been proven as the inflation hedge it was sold for. Instead, it fell when inflation was at its highest and rose over the past two years as inflation fell. This trend is not likely to change anytime soon.
Encryption catalysts are wearing out
The catalyst that caused the cryptocurrency rally in the fall of 2024 is also beginning to wane. Investors believed that this election would lead to a loosening of U.S. regulations and a more secure operating environment for crypto companies. While that may still be the case, it will be months or even years before any real innovation impacts the crypto market.
Even if that happens, it doesn't necessarily mean that innovation will occur in Bitcoin or Dogecoin. I think blockchains like Ethereum are likely to benefit the most from blockchain innovation, but the tokens themselves may still not benefit.
Advances in stablecoins, fast and low-cost blockchains, and layer 2 solutions built on top of Ethereum make it more likely that developers will be building in 2025. This could promote cryptocurrencies overall without driving new investors into these tokens. The triggers and speculation for 2024 are fading, which is having a negative impact on crypto as a whole today.
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travis hoium I have a position in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has Disclosure policy.
