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Key Points
Why is recent news from the Federal Reserve causing big sell-offs for cryptocurrencies?
The cryptocurrency market is seeing a day of big sell-offs in Thursday’s trading. Bitcoin‘s token price was down 4.8% over the previous 24 hours of trading as of 4 p.m. ET, and Ethereum‘s price was down 9.2% over the period. The valuation pullback has been even more pronounced in the altcoin space.
The popular meme token Shiba Inu (SHIB -12.39%) saw its price fall 11.5% over the last day of trading. Meanwhile, Cardano (ADA -11.24%) was also down 11.5% across the stretch, and Chainlink (LINK -12.88%) was down 13.2%.
Shiba Inu is losing ground amid a waves of sell-offs impacting the broader crypto market. Crypto prices are seeing a big pullback following news from the Federal Reserve yesterday that suggests a less bullish macroeconomic backdrop in 2025. With concerns that inflationary pressures could persist, it now looks like cuts for interest rates will arrive at a slower pace than previously anticipated.
With its meeting yesterday, the Fed announced that it was moving forward with a 25-basis point cut for interest rates. The cut marked the central banking authority’s third rate reduction since September and brought the benchmark rate down to 4.25%. The move was in line with the market’s expectations, but comments from Chairman Jerome Powell shocked the market and put a halt to a recent surge of bullish momentum that has propelled valuations for cryptocurrencies and speculative stocks higher.
Powell indicated that the recently announced rate cut was not an easy decision and signaled that the Fed will be taking a more cautious approach to rate reductions in 2025. The Federal Reserve said that it now expects to deliver only two subsequent rate cuts of 25 basis points next year, down from its previous forecast for four cuts at that level. Lower interest rates have typically been a bullish catalyst for cryptocurrencies, and the less favorable rate outlook is driving substantial sell-offs for Shiba Inu, Cardano, Chainlink, and other tokens.
Even on the heels of recent pullbacks, Shiba Inu’s token price has risen by roughly 107% across 2024’s trading. These gains have largely been propelled by speculative investing, meme coin momentum, and expectations that the incoming Trump administration will take steps that promote the growth of the crypto market.
While the change in presidential administration and shift in congressional makeup next year could create catalysts that drive Shiba Inu’s token price higher, investors should keep in mind that the token’s rally this year has not been driven by fundamentals. Accordingly, if macroeconomic conditions take a turn for the worse or other disruptive risk factors take center stage, it’s reasonable to expect that the cryptocurrency could see significant downside pressures.
Performance of Cardano and Chainlink will likely be impacted by the same macroeconomic dynamics that shape results for Shiba Inu. Lower interest rates mean that it is cheaper for investors to borrow money. In turn, this can make it more appealing to borrow money and put it into relatively high-risk investments in pursuit of explosive returns. Lower interest rates also mean that companies can borrow money more cheaply and then invest that capital into growth initiatives, which can help power gains for the overall stock market — as well as other speculative investment classes.
On the other hand, Cardano and Chainlink also have more substantive fundamental valuation cases compared to Shiba Inu. While Shiba Inu is primarily a meme token with a limited use case outside of payments and speculative investments, both Cardano and Chainlink are backed by networks that are centered around facilitating other projects and applications. This doesn’t necessarily mean they will outperform Shiba Inu, but it suggests there are a greater number of factors that could go into shaping their respective valuations.
In the near term, there’s a good chance that valuations for top altcoins and the crypto market at large will continue to be highly volatile. Investors are still weighing the impact of next year’s interest rate schedule against potential benefits from regulatory shifts under the incoming Trump administration, and token prices could see more big swings.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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