Why Bitcoin, Ethereum, and Solana Are Down This Morning

What happened

Several cryptocurrencies stumbled this morning after a volatile weekend and ahead of the Federal Reserve’s first meeting of 2023, which begins tomorrow.

Since late afternoon yesterday, the price of the world’s largest cryptocurrency, Bitcoin (BTC -4.34%), traded close to 3% lower as of 9:02 a.m. ET today, hovering around $23,000. Over the weekend, Bitcoin got close to touching $24,000.

Meanwhile, the price of the second-largest cryptocurrency, Ethereum (ETH -5.29%), traded close to 4% lower, while the price of Solana (SOL -9.74%) was down 7.5%.

So what

The big thing on everyone’s mind is the Fed meeting tomorrow, which will likely end up with some kind of interest rate hike Wednesday. Rising interest rates crushed crypto all year long in 2022 after a huge run-up in 2021. Rising interest rates make safer assets such as U.S. Treasury bills yield more, which pushes investors away from riskier assets such as Bitcoin and crypto.

After the Fed hiked its benchmark overnight lending rate, known as the federal funds rate, from zero at the start of 2022 to now inside a range of 4.25% and 4.50%, investors are desperate for the Fed to end its most intense rate-hiking campaign ever.

With inflation showing signs of slowing, many believe the Fed is now close to the end. CME Group‘s FedWatch tool, which looks at futures pricing data to see how investors are betting on the trajectory of the federal funds rate, shows an overwhelming belief the Fed will do a quarter-point hike on Wednesday. More than 98% of traders are betting on it.

But perhaps equally important are comments from Fed Chairman Jerome Powell, who has been known to spoil a market rally or two. A large portion of investors believes the U.S. economy will tip into a major recession this year. This would force the Fed to cut interest rates, triggering a risk-on environment, which will boost stocks.

But it’s possible that Powell and the Fed simply haven’t seen enough evidence, specifically in the labor market, that inflation has cooled off, and Powell may indicate that the Fed expects to at the very least hold rates higher for longer. This would not be a good situation for crypto.

In other news, the White House on Friday issued a statement saying it would like Congress to “step up its efforts” as it relates to crypto regulation and “expand regulators’ powers to prevent misuses of customers’ assets — which hurt investors and distort prices — and to mitigate conflicts of interest.”

Many crypto proponents would like to see clearer regulations made to essentially relieve the uncertainty and provide clarity for the industry.

Now what

I would expect the Fed to go ahead with a quarter-point hike on Wednesday. If there were to somehow be a half-point hike, that would most certainly roil the crypto market.

Powell’s comments will likely be the center of attention tomorrow, however. If history is the guide, I would guess that Powell is going to be more hawkish to try and prevent the market from getting ahead of itself.

Ultimately, I do think Bitcoin, Ethereum, and Solana all have great potential and could be good long-term plays. I still think crypto needs to get past the FTX debacle and contagion from its bankruptcy before it can truly escape the crypto winter. But the end of the Fed’s rate-hiking campaign will certainly be a start.