Today’s top cryptocurrencies Bitcoin (CRYPTO: BTC) and ether (CRYPTO: ETH) decreased 4.1% and 4.7%, respectively, in the last 24 hours at 3:15 p.m. ET. Popular meme token Dogecoin (CRYPTO: DOGE) kept pace with these top tokens and lost 4.6% over the same period.
These three popular cryptocurrencies have basically impacted the entire crypto market, which fell along with most of the risk assets this afternoon. The release of the minutes of the Federal Reserve’s last meeting has led analysts and investors to agree that the overly expansionary monetary policy observed so far is likely to end sooner than expected. A sharp decline in US Federal Reserve bond holdings and inflation concerns remain widespread.
It is interesting to see how the correlation between stocks and other risk assets as well as cryptocurrencies shows up again today. There may be a direct correlation between higher bond yields due to inflation concerns and lower stock market valuations. However, for cryptocurrencies like Bitcoin, often viewed as “digital gold”, it could be argued that this news is bullish.
It is clear, however, that risk assets have been trading in a higher correlation over the past few months. Loose monetary policy and cheap lending rates have spurred capital inflows into the riskiest assets in 2021. If these capital flows slow down, it is entirely possible that the momentum we saw in 2021 will start falling again this year.
Accordingly, investors seem overly pessimistic about cryptocurrencies and profit-taking will continue into the new year. Those who have made massive profits on meme tokens like Dogecoin or have benefited from the growth of the ecosystem of blockchain networks like Ethereum seem interested in taking their profits with them at this level.
The questions many investors are now asking themselves are whether cryptocurrencies can even offer portfolio protection against inflation or a more restrictive tone from the Federal Reserve. At the moment the answer seems to be a resounding “no”. However, that can change.
Cryptocurrencies have been among the best performing asset classes in recent years, increasing portfolio returns for those with even a small exposure to these digital tokens. However, it appears that investors are currently adjusting to the downward volatility. Accordingly, this momentum-driven move seems to have legs at the moment.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.