Why Crypto Is Down Today? – Forbes Advisor

· The price of Bitcoin and other cryptocurrencies tumbled to new 2022 lows this week thanks to elevated instability among stablecoins

Cryptocurrency prices began another rapid descent on Friday after U.S. Federal Reserve Chair Jerome Powell doubled down on staying the course with interest rate hikes.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said at the global central banking conference in Jackson Hole, Wyoming, Friday morning.

In response to Powell’s remarks, the crypto market took a beating. Within a few hours of his speech, the price of Ethereum (ETH) slid by more than 7% and Bitcoin (BTC) fell by about 4%. Other cryptos tumbled, with Binance Coin (BNB) slipping 5% and Solana dipping nearly 7%.

Powell’s Jackson Hole remarks also come on the heels of the Fed’s July meeting minutes, released on Aug. 17. The Federal Open Market Committee (FOMC) minutes stated, “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.”

Inflation is now higher than it has been in four decades.

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The U.S. key inflation rate slowed in July to 8.5% from its 40-year high of 9.1% in June, but that’s still significantly higher than what Powell and the rest of the Fed would like.

With fears of the Fed moving even closer to another hefty interest rate hike at their next official meeting in September, U.S. markets tumbled in response to Powell’s remarks, and cryptocurrencies followed suit.

At the time of this writing, the market is currently pricing in a 39.5% chance of a 50 basis points (bps) rate hike and a 60.5% chance of a 75 bps rate hike in September, according to CME Group’s FedWatch tool.

Powell said that the decision to raise interest rates during the September meeting would depend on the data and the evolving outlook. “At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases,” he said.

Cryptocurrency in recent months has plummeted alongside rising inflation. Bitcoin has lost more than half its value since the beginning of the year, with its current price of $20,700. ETH prices are now down more than 58% year to date, trading at around $1,580. That’s well off from Ethereum’s all-time high at nearly $4,900 in November 2021.

Selling Pressure in 2022

Some cryptocurrency investors have argued that Bitcoin and other cryptocurrencies could be used as a hedge against inflation during the digital era. But price action in cryptocurrencies suggests the market doesn’t seem to see these highly volatile assets as reliable stores of value during periods of economic uncertainty.

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As retail and institutional investors have become increasingly interested in cryptocurrencies as investment vehicles, crypto has begun to move more in tandem with the broader markets. That’s despite cryptocurrencies generally being a riskier asset class.

There’s no reason to assume an inherent correlation between cryptocurrencies and stocks, however. Even though investor interest in both tends to keep them moving in tandem for now.

These days, investors are seeking shelter from the negative economic impact of the Fed’s monetary tightening, and they just aren’t seeking it in the cryptocurrency market.

What You Need To Know About Crypto Investing

Early investors in Bitcoin, Ethereum and other cryptocurrencies have made a killing. But the cryptocurrency market has a long history of extreme volatility, which is not what investors are looking for in uncertain market conditions.

Bitcoin alone has had several deep pullbacks of more than 80% throughout its history, most recently in 2018.

Most cryptocurrencies are not tied to physical assets or intellectual property and don’t generate cash flow or pay a dividend or interest to investors. Instead, their prices are connected exclusively to supply and demand, making it difficult to assess their fundamental value, experts say.

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Berkshire Hathaway CEO and investing legend Warren Buffett once discussed Bitcoin’s shortcomings at a Berkshire annual investor meeting, telling investors he wouldn’t pay $25 for “all of the Bitcoin in the world.”

“Whether it goes up or down in the next year or five years or 10 years, I don’t know. But one thing I’m sure of is that it doesn’t multiply, it doesn’t produce anything,” he said.

Bitcoin and other cryptocurrencies may eventually see their volatility and correlation to other risk assets die down. Still, the recent price action in the cryptocurrency market suggests the bumpy ride could continue for crypto investors in the near term.

Should You Buy the Dip in Crypto?

When buying the dip, crypto investors should proceed with extreme caution.

When asset prices decline as rapidly as they have in the crypto market over recent days, it can make that coin you’ve had your eye on look like a super deal. But old Wall Street professionals have a rule of thumb that aptly describes moments like this: “Never try to catch a falling knife.”

Using your imagination, you should understand that catching a falling knife—aka “buying the dip”—nearly always ends painfully. That’s not to say that skillful investors can’t make a quick buck trading on heightened market volatility. But the point here is that big, fast market moves can be unsettling for the typical retail investor.

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