What happened
Top cryptocurrencies Binance Coin (CRYPTO:BNB), Polkadot (CRYPTO:DOT), and The Sandbox (CRYPTO:SAND) each saw significant declines today. As of 3:15 p.m. ET, the tokens had dipped 5.7%, 6.3%, and 3.6%, respectively.
The tokens each dipped to their lowest level in a week today, as continued selling pressure in the crypto world drove most major tokens lower. Investors are continuing to price macro headwinds into cryptocurrencies today, with this week’s unveiling of the Fed meeting minutes providing a negative outlook for risk assets amid expected interest rate increases and a faster-than-expected unwinding 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 relative to equities (that’s debatable), the reality is that easy money tends to search for the highest returns possible.
As the interest rates rise and the cost of capital increases, 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 may see harsher sell-offs in this newfound hawkish environment.
Now what
Central Banks globally have had a difficult time raising rates throughout the pandemic. Despite relatively low unemployment, economic conditions for certain sectors have warranted stimulus. Accordingly, those expecting a lower-for-much-longer interest rate environment have generally been proven correct over the past couple years.
Much of the capital injected into the system has flowed into higher-risk equities, particularly in 2021. With this environment unwinding, investors now appear to be questioning the ultra-bullish thesis underpinning the crypto sector in general.
Will 2022 be the year of the great unwind, both on the monetary policy side and in the crypto world? Time will tell. However, what’s clear is that continued volatility is very likely on the horizon for crypto investors.
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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