The value of major cryptocurrencies fell on Thursday as the stock market tumbled and investors worried about inflation and the continued Russian invasion of Ukraine. This follows a day when prices soared after President Joe Biden signed an executive order to study digital assets and investors hoped US regulators would finally set rules for cryptocurrencies.
Starting at 1 p.m. ET, Bitcoin ( BTC 1.16% ) had fallen 8% in the past 24 hours, Ethereum (ETH 1.51% ) was less than 6.3%, and Dogecoin ( DOGE 1.39% ) was down 7.4%.
Multiple headwinds hit the crypto market today. Most notable was a report from the Department of Labor that showed inflation hit 7.9% a year in January, the highest rate in 40 years. High inflation could mean the Federal Reserve will be more eager to raise interest rates in an effort to cool the economy, which could mean lower asset values. Cryptocurrencies usually trade with risky assets, which is why they are down sharply in trading today.
Inflation is also being fueled by an increase in the prices of commodities like oil, partly due to bans on Russian oil imports around the world. High commodity prices can divert spending from other sectors of the economy, leading to a recession. Thus, investors are trying to balance the risk of a commodity-related recession against the need for higher interest rates to control inflation.
As an asset class correlated with the stock market over the past six months, it’s no surprise that cryptocurrency values are falling with the market amid the current uncertainty.
Volatility continues to be commonplace for cryptocurrency investors and it has actually undermined some of the cryptocurrency cases. Bitcoin has specifically proven not to be a very good inflation hedge (see today’s reaction) or a safe-haven asset like gold. In fact, it has traded more like a growth stock than anything else over the past year.
I always think the case for cryptocurrencies is the utility they can bring to the markets. Financial transactions can happen in an instant, digital assets can be traded and verified on the blockchain, and more innovations will be built over time. This is where the true value will come from and frankly has little to do with the day-to-day price of cryptocurrencies.
Even though today’s decision hurts, I think yesterday’s White House executive order is much more consequential. This could pave the way for greater ownership of digital assets, cross-border transactions, and even the US government creating its own digital currency. That’s very bullish for the industry long term, which is why I hold cryptocurrencies and don’t plan to sell even on down days like this.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging 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 wealthier.