Why Crypto Cratered Before a Quick Recovery Today

What happened

The market went on a wild ride on Thursday morning after inflation data was released and investors tried to project how that would impact the Federal Reserve’s interest-rate moves. Early on, worry about higher rates resulted in falling stock prices, and cryptocurrencies were some of the hardest hit. But the drop passed quickly, and values have mostly recovered.

For example, Dogecoin (CRYPTO: DOGE) has had a strange day, falling as much as 7.7% in early-morning trading only to recover and trade about flat on the day as of 1:30 p.m. ET. Polkadot (CRYPTO: DOT) dropped up to 7.9% and is now down 1.9%, ChainLink (CRYPTO: LINK) was down as much as 11.7% and is currently off 2.8%, while The Sandbox (CRYPTO: SAND) plunged 10.9% and is now down 3.4% on the day.

So what

The biggest news of the day was the Bureau of Labor Statistics releasing data that showed consumer prices were up 8.2% year over year and 0.4% month over month in September 2022. This was a slightly higher inflation rate than investors were expecting, which was why stocks and cryptocurrencies dropped sharply early in trading.

Investors have spent much of the last six months trying to figure out how far and how fast the Federal Reserve will raise interest rates, and inflation is the Fed’s biggest concern. So higher inflation is seen as a sign that the Fed will keep increasing rates, which hurts the value of risky assets.

It’s worth keeping in mind that inflation is up big over the last year, but it’s slowed dramatically since June 2022. Although 0.4% inflation month over month seems high, that’s only one month. And the trend is toward tepid inflation right now, which might mean the Fed is closer to slowing rate increases, especially if there’s a recession.

Now what

There’s a lot to digest today, and the market seemed to have multiple views in just a few hours. But I think the takeaway is that the Federal Reserve will likely raise rates through the end of the year, and it’s possible that will lead to a recession. This isn’t a new concern; stocks have been falling for months on exactly this uncertainty.

For crypto, the impact of higher rates isn’t really known. Investors might see this as a risky asset, but cryptocurrencies aren’t risky companies that carry debt loads or aren’t profitable. These are blockchain assets that might or might not continue trading in step with volatile securities like tech stocks.

I think today’s move is another example of typical market volatility. There’s no underlying change in what’s being built on the blockchain today, but assets are being priced differently based on what the public thinks the Federal Reserve is doing. Investors with a long-term mindset should look past volatile days and focus on the long term, because that’s what matters for our portfolios.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ChainLink. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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