Cryptocurrencies Experience a Slump, Led by Bitcoin, Due to Strengthening U.S. Economic Indicators
In the cryptosphere, it's a paradox: when the economy thrives, the crypto market often takes a dive. Witnessing this phenomenon on Tuesday, popular cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin, experienced a downturn. Bitcoin plunged 4.9% in 24 hours, Ethereum sank by 7.4%, and Dogecoin tumbled 8.9% [1].
This turn of events coincided with promising economic reports. The ISM Services PMI surged to 54.1 in December, from 52.1 in November, implying strong business activity [2]. Additionally, job openings hit an impressive 8.1 million, surpassing predictions [2]. However, these positive figures came with a warning: businesses are apprehensive about escalating costs and inflation, potentially leading the Federal Reserve to curtail its accommodating stance in 2025 [2].
Cryptocurrencies, particularly Bitcoin and meme coins, correlate heavily with risk assets like growth stocks. Anticipation of interest rate increases can cause these assets to depreciate in value [1]. Hence, it's no surprise that the stock market also experienced losses.
The catch? Crypto investors weren't prepared for these economic developments, leading to $457 million in long positions being liquidated as values dipped [1]. As leverage in crypto trading can amplify market trends, this unwinding process can intensify the market's downward momentum [1].
Though often touted as an inflation hedge, Bitcoin failed to live up to its reputation during periods of high inflation. Instead, its value has paradoxically risen when inflation decreased [1]. With catalysts that fueled the 2021 crypto surge waning, and regulations potentially tightening, the crypto market faces challenges [1]. Even if improvements are made to stablecoins, Ethereum-based blockchains, and Layer-2 solutions, it may not significantly boost token prices [1]. Consequently, the 2021 picks, like Bitcoin and Dogecoin, may not be the innovation drivers in 2025 [1].
Despite the strong economic indicators, such as the ISM Services PMI and job openings reaching record highs, cryptocurrencies like Bitcoin, Ethereum, and Dogecoin experienced a significant downfall on Tuesday. This could be attributed to the anticipation of interest rate increases, which often negatively impacts risk assets like cryptocurrencies and growth stocks. The downward trend in the crypto market led to the liquidation of $457 million in long positions, further intensifying the market's downturn due to leverage in crypto trading. Despite Bitcoin being often promoted as an inflation hedge, its value paradoxically increases during periods of decreasing inflation.
