The cryptocurrency market experienced a sharp decline on Tuesday, as better-than-expected U.S. economic data fueled concerns about rising interest rates. Bitcoin (BTC) led the way, falling nearly 5%, while other major cryptocurrencies, including Ethereum (ETH) and Dogecoin (DOGE), also dropped significantly.
By 4:30 p.m. ET, Bitcoin was down 4.9% over the past 24 hours, Ethereum had fallen 7.4%, and Dogecoin was down by 8.9%. As the U.S. stock market closed, it appeared that momentum was continuing to push the market lower, suggesting that further declines could follow.
Strong Economic Data Spooks Crypto
Two key economic indicators released on Tuesday showed better-than-expected results. The ISM Services PMI, which measures business activity in the services sector, rose to 54.1 in December, up from 52.1 in November. A reading above 50 signals economic expansion, making this a bullish sign for the economy.
The Bureau of Labor Statistics also reported an increase in job openings, with 8.1 million positions available in November, surpassing the forecast of 7.7 million. This was a notable improvement from the previous month’s figure of 7.8 million.
While these readings pointed to economic growth, they also raised concerns about potential inflationary pressures. This could prompt the Federal Reserve to take a more aggressive stance on monetary policy in 2025, possibly raising interest rates if inflation starts to rise again.
Rising Interest Rates and Crypto’s Struggles
Cryptocurrencies, particularly Bitcoin and meme coins like Dogecoin, have been closely linked to risk assets like growth stocks. When expectations rise for higher interest rates, these high-risk assets tend to suffer. As a result, it’s no surprise that growth stocks also saw declines on Tuesday, mirroring the struggles in the crypto market.
Crypto investors, particularly in Bitcoin and other altcoins, had not fully anticipated the economic data’s impact, leading to significant liquidations. In total, $457 million in long positions were wiped out as prices fell. Crypto markets are often highly leveraged, and when those leveraged positions are forced to unwind, it can exacerbate the market’s volatility.
Bitcoin’s Failed Inflation Hedge
Bitcoin, once touted as a hedge against inflation, has failed to live up to its promise. Despite rising inflation in recent years, Bitcoin fell along with other risk assets. It has only gained in the past two years as inflation has eased, challenging the narrative that Bitcoin can serve as a reliable store of value.
This trend doesn’t appear likely to change anytime soon, as Bitcoin’s price moves more closely in tandem with risk assets, particularly growth stocks, rather than responding to inflationary pressures as originally hoped.
Crypto’s Catalysts Fading
The drivers that fueled the crypto surge in late 2024 are beginning to lose momentum. Many investors expected that the U.S. election would lead to reduced regulatory pressure on crypto companies, creating a more favorable environment for the sector. While this may still occur over time, it is likely to take months or even years before any meaningful regulatory changes have a substantial impact on the market.
Even when such changes happen, the beneficiaries may not be Bitcoin or Dogecoin. Instead, blockchain projects like Ethereum could see more innovation, particularly in the areas of stablecoins, fast, low-cost blockchains, and Layer-2 solutions built on top of Ethereum. These innovations could benefit the crypto ecosystem overall, but it may not translate into a surge in value for the tokens themselves.
Conclusion
The fading catalysts and speculation that drove the 2024 crypto surge are starting to weigh on the market, with Tuesday’s declines highlighting the growing challenges. As the broader economic environment shifts and interest rates rise, the future for Bitcoin, Dogecoin, and other cryptocurrencies remains uncertain, and the market faces continued volatility in the months ahead.
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