On Wednesday, there was a distinct stumbling-near-the-finish-line quality to the crypto market. Although the Federal Reserve’s rate cut announced that day was welcome, if expected, speculation about future slices wasn’t as encouraging. As a result, many investors retreated from the asset class.
That’s why many coins and tokens were booking losses as the day wore on. Bitcoin (BTC -5.42%), which vaulted above the $100,000 price level recently and seems determined to stay there, nevertheless was down by almost 5% as of 4 p.m. ET. The No. 2 coin, Ethereum (ETH -6.62%), was struggling more with an over 6% fall. Popular altcoins Solana (SOL -7.92%) and Cardano (ADA -8.12%) were both 8% or so in the red.
Shallower cuts coming?
Looking at the latest major development in a certain way, crypto-heads were robbed of an upside surprise by the Fed. The regulator’s 25-basis-point reduction to its key interest rate range was exactly what was expected widely by the market and by economists — no more, no less.
Compounding that, members of the Federal Open Market Committee (FOMC, the closely watched body that sets interest rates) collectively said they anticipate rates will be lowered only 50 basis points across all of 2025. That’s a change of tune from those officials; mere weeks ago, they were predicting a total decline of a full percentage point during the year.
Fed chair Jerome Powell added to the disappointment by sounding wary about the immediate future. He said, “I think we’re in a good place, but I think from here it’s a new phase, and we’re going to be cautious about further cuts.”
Cryptocurrencies are particularly sensitive to interest rate action and speculation. That’s because they’re fairly volatile compared to more traditional investments like stocks. As such, when rates decline, cryptos tend to be more attractive, since theoretically the market has a bigger appetite for risk (also, safe harbor investments usually yield less, adding to the attractiveness).
Possible market overreaction
The sudden appearance of this headwind makes the crypto market rather uncertain as we barrel into 2025. Yet even if we’re not getting the aggressive interest rate slicing crypto investors are so thirsty for, I think coins and tokens will bounce back before long.
They have much momentum behind them and have leaped into legitimacy, in the average investor view. The presidential administration that will take power next month not only supports cryptocurrencies implicitly, certain members — like Vice President-elect J.D. Vance — have actually invested in them. Also, the spot crypto exchange-traded funds (ETFs) introduced early this year remain popular and will continue to support the market.
Eric Volkman has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Cardano, Ethereum, and Solana. The Motley Fool has a disclosure policy.
