Lofty prices for parody coins. Celebrity-driven commercials for trading platforms. A frenzy over non-fungible tokens has enticed famous names including former first lady Melania Trump. Even after a pullback in the past month, the cryptocurrency market remains full of frothy behavior.
Yet lately, signs are mounting that crypto could be headed for a pronounced selloff. And the Federal Reserve’s hawkish pivot on Wednesday may just accelerate the process.
One telling signal is that trading volumes for both crypto and NFTs are declining after parabolic surges. In their latest reported quarters, crypto-focused Block Inc., formerly known as Square, and Coinbase Global Inc. both reported digital currency trading revenue significantly below market expectations as transactions on their platforms slowed. Meanwhile, the aggregate value of NFTs traded on marketplaces has fallen since its August highs.
The Fed shifts gears
The U.S. government and the Fed have pumped trillions of dollars into the economy during the Covid-19 pandemic through monetary and fiscal policy stimulus. Some of that money ultimately flowed into risky alternative assets like crypto and NFTs. But as the Fed tapers its stimulus, crypto assets are likely to be some of the first to fade.
U.S. consumer prices have registered their largest monthly gains in decades recently. Inflation data for October, released Nov. 10, triggered a sell-off in Bitcoin as traders began anticipating the Fed turning off the spigot to slow inflation. The original cryptocurrency has now fallen roughly 30% from its early November peak. Bitcoin continued its decline Thursday after the Fed announced a day earlier that it would end its asset-purchase program sooner than anticipated and expects to raise interest rates next year.
