Three of the largest cryptocurrencies are stumbling today. Here’s why.
Three of the most important cryptocurrencies investors watch are showing a lot of red on the screen today. As of 2:15 p.m. ET, Bitcoin (BTC -1.82%), Shiba Inu (SHIB -3.02%), and Dogecoin (DOGE -5.07%) led the crypto market lower with declines of 3.7%, 8.1%, and 7.5%, respectively, over the past 24 hours.
These moves are certainly significant, but they do represent a relatively small dent in the monthly and year-to-date gains of each of these tokens. Bitcoin is still up more than 7% over the past month and 130% over the past year, with Shiba Inu and Dogecoin seeing monthly and yearly gains of 28% and 15%, and 139% and 88%, respectively.
Now, the question many investors have is whether this near-term move is a temporary profit taking and consolidation trend over the near term, or if there are more structural factors that may impact these tokens. Let’s dive into what’s behind today’s moves in these top tokens.
Structural or near-term profit taking?
One of the key market-related trends that appears to be driving a near-term sell-off in most risk assets (equities included) are remarks today from Federal Reserve Chairman Jerome Powell that “This is not a committee that feels like it’s in a hurry to cut rates quickly. … If the economy performs as expected, that would mean to more rate cuts this year, a total of 50 [basis points] more.”
Interest rates moving lower faster were one of the key drivers behind bets on stable, gold-like assets such as Bitcoin. The idea is that as interest rates come down and the U.S. dollar weakens, assets like Bitcoin that may be viewed as commodity-like in nature should grab a bid. Additionally, faster interest rate cuts could imply recessionary forces ahead, something many in the sound money crowd continue to contend should be bullish for Bitcoin and related tokens.
The move in Bitcoin and many risk assets has driven demand lower for top meme tokens such as Shiba Inu and Dogecoin. Today’s liquidation data show Shiba Inu and Dogecoin have both seen a number of long liquidations (bullish investor positions blow up), with Shiba Inu seeing the largest liquidations since early June. Both tokens combined saw more than $5 million of bullish bets on these tokens liquidated, forcing investor capital out of these tokens and initiating forced selling.
Thus, many of the factors at play for these three top cryptocurrencies do appear to be near-term in nature, and I don’t see anything unusual about today’s move. Bitcoin’s breakdown on larger macro factors has unsurprisingly bled into derivatives investors losing their shirts on long bets on meme tokens. That’s a story that’s played out over and over again in this space.
So, is it all an interest rate play?
Right now, the overall market does appear to be more laser focused on monetary policy, and that’s arguably been the case for the past few years. Interest rates do impact valuations of higher-risk assets to a greater degree, and the higher-volatility nature of these three cryptocurrencies provides significant upside potential when the market views monetary policy actions as positive. The inverse is also true.
Right now, investors do appear to be getting spooked by the idea that the Fed may not be acting aggressively enough on its cutting cycle as it did during its hiking cycle. And with various tokens typically seeing outsize returns in the last quarter of the year, it’s my view that speculative capital could easily flow back into these assets, if these headwinds do indeed turn out to be temporary.
Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
