The irony of the crypto market is how much it falls when the economy is doing well. On Tuesday, a couple of important economic readings came in better than expected, and Bitcoin (BTC -4.94%) and other cryptocurrencies dropped on the news.
As of 4:30 p.m. ET, Bitcoin was down 4.9% in the past 24 hours, Ethereum (ETH -8.63%) was off 7.4%, and Dogecoin (DOGE -11.82%) was down 8.9%. Momentum appears to be putting further downward pressure on the market, so those declines could get worse as the U.S. stock market closes.
Good economy, but bad for crypto
The ISM Services PMI — which measures an index of services and their orders, backlog, business activity, and other items — rose to 54.1 in December from a reading of 52.1 in November. A reading over 50 indicates economic expansion, so this was a bullish reading for the economy.
The other reading was job openings from the Bureau of Labor Statistics, which came in at 8.1 million, up from 7.8 million and beating the estimate of 7.7 million from economists.
Both of these are strong economic indicators, but they also came with warnings that businesses are worried about higher costs and inflation. That could lead the Federal Reserve to be less accommodating in 2025 and potentially raise interest rates if inflation picks up.
Crypto, particularly Bitcoin and meme coins like Dogecoin, trade highly correlated with risk assets like growth stocks. When investors speculate interest rates will rise, these assets fall in value. It’s no surprise that growth stocks were also down today.
Bitcoin and crypto caught off guard
The better-than-expected news caught crypto investors unprepared, leading to $457 million in long positions being liquidated as values dropped. Crypto trading can often be highly leveraged, and if that leverage is unwound when values move higher or lower, it can cause an amplification of the underlying market trend.
Bitcoin hasn’t proven to be the inflation hedge it was sold as. Instead, it fell when inflation was highest and has risen over the past two years as inflation fell. It doesn’t look like that trend is going to change anytime soon.
Crypto catalysts are wearing off
The catalysts that drove the fall 2024 crypto surge are also starting to wear off. Investors thought the election would lead to reduced regulations in the U.S. and a more certain operating environment for crypto companies. That may still be the case, but it will likely take months or years for real innovations to impact the crypto market.
Even when that happens, Bitcoin and Dogecoin may not be where innovation takes place. I think a blockchain like Ethereum is the most likely to benefit from blockchain innovation, but even then, it may not benefit the token itself.
Advances in stablecoins and fast, low-cost blockchains and Layer-2 solutions built on top of Ethereum are more likely to be where developers build in 2025. That could help crypto overall without driving new investors to these tokens. The catalysts and speculation of 2024 are wearing off, and that’s hurting crypto across the board today.
Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
