The cryptocurrency market experienced a decline early on Friday, which was not attributed to industry-specific issues but rather to weak economic data. Historically, cryptocurrencies have not served as effective hedges against economic downturns or inflation. The last instance of economic slowdown coupled with rising inflation resulted in a significant drop in Bitcoin’s value.
As of 1:30 p.m. ET, over the preceding 24 hours, Bitcoin decreased by 3.6%, Ethereum fell by 6.3%, and Dogecoin declined by 4.9%. There is speculation regarding the potential continuation of this downward trend.
In terms of economic trends, cryptocurrencies tend to correlate more closely with growth stocks rather than serving as safeguards against inflation or economic challenges. Generally, lower interest rates favor cryptocurrency values, while higher rates and inflation negatively impact them. Although Bitcoin has been marketed as a hedge against inflation, historical data suggests otherwise.
Recent economic data showed the PCE price index increased by 2.5% from the previous year, consistent with expectations, but core PCE rose by 2.8%, and January’s core PCE was adjusted upward. This occurred prior to any potential effects of tariffs on future goods prices. Rising prices complicate the Federal Reserve’s plans, as it aims to stimulate the economy with lower rates, but may need to raise rates to counteract inflation, thereby potentially harming cryptocurrency valuations.
Consumer sentiment data also revealed concerns, as shown by the University of Michigan’s consumer sentiment index dropping to 57 in March and the Conference Board’s Expectations Index declining to 52.6. Lower consumer confidence combined with rising prices poses challenges for the market, particularly for riskier assets like cryptocurrencies.
The situation for crypto investors suggests further challenges may lie ahead. Persistently high prices, driven by rising tariffs and potential trade conflicts, could negatively impact the value of cryptocurrencies. As risk assets with limited utility, cryptocurrencies might be liquidated by investors needing funds in difficult economic times. Without supporting business structures, their value depends on continued demand, which could diminish in a struggling economy.
The factors that contributed to the partial recovery of cryptocurrencies in 2024 have not fundamentally altered the industry’s landscape. Acceptance of Bitcoin, Ethereum, and Dogecoin by businesses remains largely unchanged, while stablecoins are gaining more traction due to their use of blockchain without the volatility associated with cryptocurrencies. The market sell-off may not be over, and a rebound in the economy and the market could take some time.
