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Crypto, the Fed and the debt ceiling: Why Bitcoin, Ethereum, and Litecoin are falling today

Some investors are now starting to walk back their beliefs about interest rate cuts later this year.

What happened with cryptocurrencies today?

Several of the largest cryptocurrencies fell today in what appeared to be a move driven by macro fears, uncertainty about the debt ceiling, and ahead of the release of the Federal Reserve’s May meeting minutes today.

Since late afternoon yesterday, the price of the world’s largest cryptocurrency Bitcoin (CRYPTO: BTC) traded 3% lower as of 11:45 a.m. ET today. Meanwhile, the price of the world’s second-largest cryptocurrency Ethereum (CRYPTO: ETH) traded 3.2% lower, while the price of Litecoin (CRYPTO: LTC) was down 5.3%.

So what

Part of what’s been dogging cryptocurrencies today is the constant tug-of-war investors are having about their view on the Fed and interest rates and whether on not the Fed will pause its rate-hiking campaign at its next meeting. Currently, roughly 72% of investors are betting on a pause but that’s a smaller percentage than it had been recently.

Fast-rising interest rates over the last year have crushed the likes of crypto and Bitcoin because they make riskier assets less appealing. Crypto has rallied this year largely on the belief that the Fed is preparing to end its rate-hiking campaign.

Will they raise them again? Powell says Fed interest rates may not need to rise as much amid banking stress

Inflation has slowed a good amount this year but is still far away from the Fed’s 2% target and the job market still looks extremely strong, which has investors questioning whether or not the Fed has seen enough data to end its rate-hiking campaign.

“Most developed markets are grappling with a shared problem. Core inflation is proving more stubborn than expected and remains well above central banks’ 2 per cent targets,” BlackRock analysts wrote in a recent research note. “We think that means central banks can’t undo any of their inflation-fighting rate hikes any time soon, even if financial markets think the Federal Reserve will start cutting rates before the end of the year.”

On top of all of this, U.S. lawmakers still haven’t reached an agreement to raise the debt ceiling, and the June 1 deadline when the U.S. could potentially default on its debt is rapidly approaching. Treasury yields have risen as a result of the uncertainty, which usually leads investors to take a risk-off approach.

Now what

Cryptocurrencies have been rising all year on the belief that a Fed pause is near, but now investors are less sure that a pause and the rate cuts the market had been pricing in will actually materialize.

At 2 p.m. ET today, the Fed will release the minutes from its meeting earlier this month, which could shed light on whether or not the Fed will pause rates at its June meeting. The fact that we still don’t have an agreement to raise the debt ceiling is concerning, but I’m hopeful lawmakers will eventually come to their senses. Cryptocurrencies tend to do well when the traditional financial system struggles, but if the U.S. defaults on its debt it’s hard to know exactly what would happen.

What happens if the US defaults? What you need to know as the debt ceiling deadline nears.

I continue to believe Bitcoin and Ethereum are here to stay long term and like them as long-term investments. I own a little bit of Litecoin and there’s talk that the altcoin may benefit from its upcoming halving event, but I really prefer Bitcoin and Ethereum.

Bram Berkowitz has positions in Bitcoin, Ethereum, and Litecoin. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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