What happened
Top cryptocurrencies Binance coin (CRYPTO: BNB), Speckle (CRYPTO: POINT), and The sandpit (CRYPTO: SAND) each saw significant declines today. By 3:15 p.m. ET, tokens were down 5.7%, 6.3% and 3.6%, respectively.
Tokens each fell to their lowest levels in a week today as continued selling pressure in the crypto world drove most of the major tokens down. Investors continue to price in macro headwinds in cryptocurrencies today, with the Fed’s minutes’ release this week offering a negative outlook for risk assets amid expected rate hikes and a faster-than-expected liquidation of the Fed’s balance sheet.
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so what
Macroeconomic factors affect all asset classes. And while some investors in the crypto community may believe that cryptocurrencies are low beta assets compared to stocks (that’s debatable), the reality is that easy money tends to produce the highest possible returns.
As interest rates rise and the cost of capital rise, investors are forced to look at the fundamentals and cash flows of their specific investments. With cryptocurrencies generally lacking cash flows, these difficult-to-value assets can see tougher sell-offs in this newly discovered restrictive environment.
What now
Central banks around the world struggled to raise rates throughout the pandemic. Despite relatively low unemployment, economic conditions have provided incentives for certain sectors. Accordingly, those who expect a lower for much longer interest rate environment have generally proven correct in recent years.
Much of the capital injected into the system flowed into riskier stocks, especially in 2021. In this weakening environment, investors now seem to be questioning the ultra-bullish thesis that underpins the crypto sector in general.
Will 2022 be the year of major storms, both on the monetary policy side and in the crypto world? We will see. What is clear, however, is that persistent volatility is very likely for crypto investors.
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Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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