Why Bitcoin, Ethereum, and Dogecoin Are Down Today

What happened

Most cryptocurrencies fell today, as the intense selling from last week resumed due to most of the same concerns about the Federal Reserve’s ongoing policies and the economy.

Over the past 24 hours (as of 9:50 a.m. ET today), the price of the world’s largest cryptocurrency, Bitcoin (BTC -5.05%), has traded more than 5% down, to roughly $20,780.

The price of the world’s second-largest cryptocurrency, Ethereum (ETH -7.20%), has traded nearly 7% down, and the price of the meme token Dogecoin (DOGE -7.06%) is down nearly 6%.

So what

Cryptocurrencies have not fared well, as the Fed has turned hawkish this year in order to tackle inflation. That has included its raising its benchmark overnight lending rate, the federal funds rate, from practically zero to inside a range of 1.5% to 1.75% after its latest 75-basis-point (0.75%) rate hike last week.

Image source: Getty Images.

As rates rise, riskier assets like cryptocurrencies don’t tend to fare as well because safer assets like U.S Treasury securities now yield more. In addition, Citigroup earlier today raised its expected likelihood of a recession to 50%.

“The global economy continues to be afflicted by severe supply shocks, which are pushing up inflation and driving down growth,” Citi’s chief global economist, Nathan Sheets, wrote in a research note. “But more recently, two further factors have burst onto the scene: Central banks are hiking policy rates with increasing vigor in their fight against inflation, and the global consumer’s demand for goods looks to be softening.”

The Fed has also begun reducing its massive (nearly $9 trillion) balance sheet, which means running off bond holdings. That will essentially remove liquidity from the economy, a move that could hurt Bitcoin even more.

“In a world where liquidity is plentiful, the bitcoins of this world do well,” Ian Harnett, the chief investment officer of Absolute Strategy Research, recently told CNBC. “When that liquidity is taken away — and that’s what the central banks are doing at the moment — then you see those markets come under extreme pressure.”

Harnett thinks the price of Bitcoin could drop to as low as $13,000, which would certainly drag down the rest of the crypto market with it.

Recently, there have been some large sellers of Bitcoin and pressure on investors as the price of Bitcoin drops. The crypto intelligence service Arcane Research noted recently that Bitcoin’s huge drop over this past weekend might have been a result of the largest Bitcoin spot ETF losing half of its assets under management.

Purpose Bitcoin ETF apparently lost more than 24,500 Bitcoin tokens last Friday, its largest since since going public on the Canadian Stock Exchange in April 2021. The departure of the assets resulted in the ETF having to sell roughly $500 million of Bitcoin, according to Arcane Research, which can’t have been good for supply-and-demand dynamics. Arcane analysts believe the sudden exit of funds could have been caused by “a forced seller in a huge liquidation.”

Now what

I certainly agree with Harnett that the price of Bitcoin could continue to march lower, as the Fed continues its balance sheet reduction efforts. However, trying to time markets is nearly impossible.

Long term, I do believe Bitcoin and Ethereum are here to stay and will be good long-term buys at these levels. I have never been a fan of Dogecoin because it has no use in the real world and no technical advantage over other cryptocurrencies, which is why I would recommend avoiding the meme token.