The crypto market has been experiencing a downward trend in the past week, as investors brace for the upcoming Federal Reserve meeting that could signal a change in monetary policy. Bitcoin and ether, the two largest cryptocurrencies by market value, have both dipped below key support levels, raising concerns about the future of the crypto industry.
Bitcoin, the most popular and widely used cryptocurrency, has been struggling to maintain its momentum since reaching an all-time high of over $69,000 in November 2023. The digital asset has lost about 7% of its value in the past week, and slipped below $40,000 for the first time in a month on Monday.
Some analysts attribute the decline to the outflows from Grayscale’s Bitcoin Trust, which converted into an exchange-traded fund (ETF) earlier this month. The trust, which holds bitcoin on behalf of investors, has seen its holdings drop from around 619,000 BTC at the end of December 2023 to just under 567,000 BTC as of Friday. This means that the trust is selling more bitcoin than it is buying, putting downward pressure on the price.
Ether Loses 6% in 24 Hours as Ethereum Network Faces Challenges
Ether, the native currency of the Ethereum network, has also faced a significant drop in the past week, losing about 6% of its value in 24 hours on Monday. The second-largest cryptocurrency by market value was trading around $2,330, well below its record high of over $4,800 in November 2023.
One of the reasons for ether’s slump is the high congestion and fees on the Ethereum network, which hosts most of the decentralized applications (dApps) and smart contracts in the crypto space. The network has been struggling to cope with the increasing demand for its services, especially from the booming sectors of decentralized finance (DeFi) and non-fungible tokens (NFTs).
The Ethereum community is working on a major upgrade, known as Ethereum 2.0, that aims to improve the scalability, security, and efficiency of the network. However, the transition to the new version is expected to take several years, and some users and developers are losing patience and switching to alternative platforms.
Crypto Market Faces Uncertainty Ahead of Fed Meeting
The crypto market’s woes are not only due to internal factors, but also to the external environment, especially the expectations for the upcoming Federal Open Market Committee (FOMC) meeting on January 25-26. The FOMC is the policy-making body of the Federal Reserve, the central bank of the United States, and its decisions have a significant impact on the global economy and financial markets.
The Fed has been facing increasing pressure to tighten its monetary policy, as inflation in the US has reached its highest level in nearly four decades. Inflation erodes the purchasing power of money and reduces the attractiveness of fixed-income assets, such as bonds. The Fed’s main tool to combat inflation is to raise the interest rate, which is the cost of borrowing money. A higher interest rate makes borrowing more expensive and encourages saving, thus reducing the money supply and the inflationary pressure.
However, a higher interest rate also has negative consequences for the economy and the markets, as it slows down the economic growth and reduces the profitability of businesses and investments. Therefore, the Fed has to balance the trade-off between fighting inflation and supporting the recovery from the pandemic-induced recession.
The Fed has already signaled that it will end its bond-buying program, known as quantitative easing (QE), by March 2024, and that it will start raising the interest rate later this year. However, the market is uncertain about the pace and magnitude of the rate hikes, and how they will affect the demand and supply of various assets, including cryptocurrencies.
Some crypto enthusiasts argue that cryptocurrencies, especially bitcoin, are a hedge against inflation, as they have a limited supply and are not controlled by any central authority. They believe that cryptocurrencies will benefit from the Fed’s tightening, as more investors will seek alternative assets that can preserve their value and offer higher returns.
Others, however, contend that cryptocurrencies are a risky and speculative asset class, that is highly sensitive to the market sentiment and liquidity conditions. They warn that cryptocurrencies will suffer from the Fed’s tightening, as investors will flee to safer and more stable assets, such as the US dollar and gold.
What’s Next for Bitcoin and Ether?
The crypto market is facing a critical moment, as it awaits the outcome of the Fed meeting and its implications for the global economy and financial markets. The market is likely to experience high volatility and uncertainty, as traders and investors adjust their positions and expectations.
Bitcoin and ether, as the leaders and representatives of the crypto industry, will play a key role in determining the direction and sentiment of the market. Both cryptocurrencies have shown remarkable resilience and innovation in the past, overcoming various challenges and reaching new heights. However, they also have to deal with their own issues and limitations, such as scalability, security, and regulation.
The future of bitcoin and ether, and the crypto market as a whole, depends on a number of factors, both internal and external, that are hard to predict and control. Therefore, the best strategy for crypto enthusiasts and investors is to stay informed, diversified, and cautious, and to be prepared for any scenario.