The crypto market was in full sell-off mode late on Wednesday and into Thursday as investors assessed the risk in the market. The Federal Reserve didn’t help matters, releasing minutes from a recent meeting that confirmed the market’s expectations that the central bank will be raising benchmark interest rates and reducing its bond holdings.
Bitcoin (CRYPTO:BTC) remains the giant among cryptocurrencies, and even it wasn’t spared. Its token price had fallen by as much as 8.9% in the last 24 hours as of 11:30 a.m. ET. The cryptocurrency is down 7.7% as I’m writing.
The biggest news of the day is that the Federal Open Market Committee released the minutes from its most recent meeting, and its members appear to think the Fed may need to raise interest rates sooner than previously expected. Investors were expecting about three 25-basis-point interest rate increases in 2022, but recent economic data had offered some hope that those rate hikes might be pushed closer to the end of the year.
It’s also expected that the Fed will reduce the amount of bonds on its balance sheet, effectively pulling money out of the system. One factor that has driven cryptocurrencies higher over the past two years is that the U.S. government and the Federal Reserve have flooded the market with liquidity — through ultra-low interest rates, bond buying, and stimulus policies — but the period of loose money policies will soon come to an end.
As much as fans of cryptocurrencies have talked them up as hedges against inflation or broad-market downturns, they act a lot more like growth stocks. Cryptocurrencies shot up in 2020 when the Federal Reserve and Congress flooded the economy with money and investors poured into riskier assets in search of better returns. With the Federal Reserve easing back on its stimulus and with political wrangling in Congress stalling its stimulus efforts, it makes sense that cryptocurrencies would lose value.
A lot of growth stocks have reacted to the Fed’s minutes as well, and the general trend for growth and crypto assets has been lower. This shouldn’t be surprising: Those are higher-risk assets, and when the Fed tightens its monetary policy, traders typically do “risk-off” trades.
Long term, however, this is a volatile day of what I would call noise for cryptocurrencies. There wasn’t any fundamental news out about any of these assets, and there’s no reason to change your investment thesis as a result.
Remember that investing in cryptocurrency is volatile — big short-term swings are just the price of admission. Tomorrow, the decline could reverse, or it could get worse — but the long-term trends of the industry are what investors should keep focused on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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