The recent upward momentum in cryptocurrencies came to a halt over the past 24 hours following a Federal Reserve decision to lower interest rates. While rate cuts might seem positive at first glance, the Fed also forecasted higher inflation and unemployment rates for 2025. This sparked concerns among investors, leading to a sell-off in riskier assets like cryptocurrencies.
As of 3 p.m. ET, Bitcoin (BTC) experienced a 6.2% decline, slipping below the $100,000 mark. Ethereum (ETH) saw a sharper drop of 9.7% to $3,350, and Dogecoin (DOGE) plummeted 16.8% to $0.3032.
The Federal Reserve’s Influence on Cryptocurrencies
Despite their positioning as alternatives to traditional financial systems, cryptocurrencies often behave like conventional risk assets. Rising interest rates typically pressure growth stocks, and cryptocurrencies tend to follow a similar pattern.
Although the Fed recently reduced rates, its commentary on inflation raised concerns over long-term bond yields, which have risen by six basis points since the announcement. Over the past year, the 10-year government bond yield has climbed by 64 basis points, making higher rates a headwind for crypto valuations, as seen during 2022.
Is the FOMO Cycle Ending?
The recent crypto rally was partly fueled by speculation tied to political events, such as the election and expectations of pro-crypto policies. Fear of missing out (FOMO) drove valuations higher, but this momentum may be fading.
There was also hope that Bitcoin might be adopted as a reserve asset by the U.S. or other governments. However, Fed Chair Jerome Powell confirmed the Federal Reserve is not authorized to purchase Bitcoin, dampening enthusiasm.
This scenario mirrors a classic «buy the rumor, sell the news» dynamic, where optimism wanes once anticipated events fail to materialize.
Looking Ahead to 2025
The significant gains from the past year were largely speculative, driven by developments like ETF approvals and political optimism. As these tailwinds diminish, the focus may shift to the influx of new crypto buyers.
MicroStrategy, a major Bitcoin investor, has also faced challenges as its strategy appears less advantageous without a substantial premium. The company’s multibillion-dollar Bitcoin acquisitions have significantly influenced the market, and its struggles have contributed to the broader crypto downturn.
Should You Invest in Bitcoin Now?
Before making any Bitcoin investments, consider this: Analysts at The Motley Fool Stock Advisor have identified 10 stocks they believe offer superior returns compared to Bitcoin. Their past recommendations, such as Nvidia in 2005, have yielded extraordinary gains, with the service’s average return outperforming the market by a wide margin.
As always, informed decisions based on thorough research are essential when navigating the volatile cryptocurrency landscape.
