What happened
Today, top cryptocurrencies Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) declined 4.1% and 4.7%, respectively, over the past 24 hours as of 3:15 p.m. ET. Popular meme token Dogecoin (CRYPTO:DOGE) kept pace with these top tokens, dropping 4.6% over the same time frame.
These three popular cryptocurrencies have basically paced the entire crypto market, which fell along most risk assets early this afternoon. The release of minutes from the previous Federal Reserve meeting has resulted in analysts and investors agreeing that the overly accommodative monetary policy we’ve seen thus far is likely to end sooner than expected. A sharp reduction in Federal Reserve bond holdings, and concerns around inflation, remain rampant.
Image source: Getty Images.
So what
It’s interesting to see the correlation between equities and other risk assets, and cryptocurrencies, play out again today. One might be able to draw a direct correlation between higher bond yields spurred by inflation concerns and lower valuations in the stock market. However, for cryptocurrencies like Bitcoin, often viewed as “digital gold,” arguments could be made that this news is bullish.
That said, it’s clear that risk assets are trading in higher correlation in recent months. Easy money policies and cheap borrowing rates have resulted in a surge of capital inflows into the riskiest of assets in 2021. If these capital flows slow, it’s entirely possible that the momentum we saw in 2021 could revert to the downside this year.
Accordingly, investors appear to be taking an overly bearish view of cryptocurrencies, with profit-taking continuing into the New Year. Those who saw massive gains from meme tokens such as Dogecoin, or benefited from the ecosystem growth of blockchain networks like Ethereum, appear keen to take their profits at these levels.
Now what
The questions many investors now have is whether cryptocurrencies can provide any portfolio protection at all to inflation or a more hawkish tone by the Federal Reserve. Right now, the answer appears to be a resounding “no.” However, that can change.
Cryptocurrencies have been among the best-performing asset classes in recent years, amplifying portfolio returns for those who added even a small amount of exposure to these digital tokens. That said, investors appear to be bracing for downside volatility right now. Accordingly, this momentum-driven move appears to have legs right now.
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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