The Federal Reserve wants to raise interest rates three times this year. If that happens, risky investments could drop the most as investors seek safer returns.
- A new report suggests that Fed interest rate hikes this year could put Dogecoin and Shiba Inu returns in the doghouse.
- As borrowing gets more expensive and corporate profits get squeezed due to rate hikes, risk-averse investors are likely to move funds to “safe haven” investments such as adjustable bonds.
- According to the report, an exodus from highly speculative assets such as Dogecoin and Shiba Inu could dramatically hurt those cryptos.
Last week, chief commodity strategist at Bloomberg, Mike McGlone, issued his latest research report titled — “Crypto Outlook: Don’t Fight the Fed” — which looks at the impact of pending government interest rate hikes on cryptocurrencies. While McGlone’s outlook is not good for thousands of the no-name crypto projects out there, he says Dogecoin (DOGE) and Shiba Inu (SHIB) are likely to be hit especially hard.
Rising inflation forces the Fed to try and cool the economy
Since May 2021, monthly year-over-year inflation has exceeded 5%. Last month, Fed Chair Jerome Powell announced that the Federal Open Market Committee could raise interest rates three times this year to cool down the economy to slow inflation. The Fed has further suggested since then that the first rate hike could occur as soon as March 2022.
Generally speaking, when interest rates rise investors tend to migrate from high-risk, speculative investments to safer options. According to McGlone that financial flight would hurt DOGE and SHIB harder than other crypto assets.
“Crypto tops the speculative excesses and may be an early indicator that the broader market tide is due to recede. Peaks in meme coins Dogecoin and Shiba Inu have coincided with similar market highs, emphasizing the leading indications from crypto,” stated McGlone in his report.
“SHIB in the second half of 2021 and DOGE in the first half of 2021 are examples of coins that are speculative hype and fun for gamers on an unprecedented global scale, 24/7.”
What he’s saying is that what shoots up fast tends to drop just as far and fast, which is what has happened with Dogecoin and Shiba Inu. McGlone labels those coins as “highly speculative” within the already volatile crypto asset class.
Fed interest hikes could disproportionately hurt DOGE and SHIB
McGlone specifically noted that crypto bellwethers such as Bitcoin, Ethereum, and Tether will likely be fine in the face of Fed interest-rate action — but not so for highly speculative projects such as DOGE and SHIB, “Switching between mainly speculative cryptocurrencies competing with Bitcoin, ETH and USDT is a model that investors should exercise caution.”
The entire crypto sector started the year down, but DOGE and SHIB — which were both created as jokes — fell farther and harder than Bitcoin and Ethereum. Bitcoin and Ethereum are down from their respective all-time highs by about 40% and 30%.
By comparison, DOGE is down 78% from its all-time high of $ 0.74 in May and is now trading at $ 0.1588 at time of writing. SHIB is down 64% today since it hit a record high of $ 0.00008845, according to CoinMarketCap data.
Since their peaks, both DOGE and SHIB have since dropped out of the top 10 coins by market capitalization, and McGlone suggests those speculative assets could have further to fall in the face of rising interest rates. “The endless battle for the top cryptocurrencies, often fueled by hype and speculation, makes us realize that most things that add up quickly are scary.”
At the time of writing, SHIB is trading up 14% and DOGE is up 7% — so perhaps some of those losses could be recouped in the short term. But in the long term, meme coin investors might consider McGlone’s pithy opinion in the title of his report — don’t fight the Fed.
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