Why Bitcoin, Ethereum and Dogecoin are down today

What happened

Most cryptocurrencies fell today as last week’s heavy selling resumed on most of the same concerns about ongoing Federal Reserve 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 -4.04%)traded down more than 5% to around $20,780.

The price of the second largest cryptocurrency in the world, Ethereum (ETH -5.39%)traded down almost 7%, and the price of the token even Dogecoin (DOGE -5.21%) is down nearly 6%.

So what

Cryptocurrencies have not fared well as the Fed has become hawkish this year in order to fight inflation. This included its increase in its benchmark overnight lending rate, the federal funds rate, from virtually zero to within a range of 1.5% to 1.75% after its last rate hike. 75 basis points (0.75%) last week.

Image source: Getty Images.

As rates rise, riskier assets like cryptocurrencies tend not to fare as well, as safer assets like US Treasury securities now pay more. In addition, Citigroup earlier in the day raised its expected probability of a recession to 50%.

“The global economy continues to be plagued by severe supply shocks, which are driving up inflation and dampening growth,” Citi’s chief global economist, Nathan Sheets, wrote in a research note. “But more recently, two other factors have burst onto the scene: central banks are raising policy rates with increasing vigor in their fight against inflation, and global consumer demand for goods appears to be weakening.”

The Fed has also started shrinking its massive balance sheet (nearly $9 trillion), meaning it has shed its bond holdings. This will essentially remove liquidity from the economy, a move that could hurt Bitcoin even more.

“In a world of abundant liquidity, bitcoin in this world is doing well,” Ian Harnett, chief investment officer of Absolute Strategy Research, told CNBC recently. “When that liquidity is removed – and central banks are doing that right now – then you see those markets under extreme pressure.”

Harnett thinks the price of Bitcoin could drop all the way to $13,000, which would certainly take the rest of the crypto market with it.

Recently, there have been heavy sellers of Bitcoin and pressure on investors as the price of Bitcoin declines. Crypto intelligence service Arcane Research recently noted that Bitcoin’s huge drop over the past weekend may have been the result of the largest Bitcoin spot ETF losing half of its assets under management.

Objective Bitcoin ETF apparently lost more than 24,500 bitcoin tokens last Friday, its largest since its listing on the Canadian stock exchange in April 2021. The asset departure forced the ETF to sell around $500 million worth of bitcoin, according to Arcane Research, which can n haven’t been good for the dynamics of supply and demand. Arcane analysts believe the sudden outflow of funds may have been caused by “a seller being forced into a huge sell-off”.

Now what

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

Long term, I 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 as it has no real world use and no technical advantage over other cryptocurrencies which is why I would recommend avoiding the meme token.

About Valerie Wilson

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