Why Ethereum, Bitcoin and Solana fell on Saturday

What happened

The cryptocurrency market continues to trade closely with the stock market, and it has continued over the weekend. On Friday, central bank governor Jerome Powell said that the restrictive interest rate policy will continue until inflation is under control. That means interest rates will remain high and investors are selling risky assets as a result.

As of 1:30 p.m. ET, Ethereum (ETH -5.42%) had fallen 7.1% in the last 24 hours, Bitcoin (BTC -3.37%) was down 3.5%, and Solana (SUN -5.81%) had fallen 5.7 percent. Most of the fall occurred on Friday or early Saturday, and the market had settled down by midday Saturday.

So what

Powell is at the Economic Symposium in Jackson Hole, Wyoming, an annual conference closely watched by investors. He would not say whether interest rates would rise 50 basis points or 75 basis points, but it was clear the focus is on getting inflation under control over keeping the economy growing.

Higher interest rates tend to slow the economy because companies are unable to raise capital at prices as attractive as when interest rates are low. This can have the effect of forcing investors into assets that pay higher prices, such as dividend stocks or bonds, and out of risky assets such as cryptocurrencies.

The economic downturn is what I would be worried about at the moment. Jobs data has been strong for most of 2022 despite the increase in rates, but that won’t last forever. If businesses cut back on hiring or even lay off employees, it will leave people with less discretionary spending.

Crypto has benefited greatly from consumers having higher savings and money they are willing to invest in highly speculative assets. If the money dries up, the crypto market could still go lower.

What now

The Federal Reserve’s moves do not directly affect cryptocurrencies, but there may be second- and third-order effects. Many early crypto products are yield-generating, meaning they will compete with higher interest rates in traditional markets. This can make them less competitive in the market. It also means that a cryptocurrency like Ethereum or Solana that has stakes will be slightly less attractive compared to dividend stocks and bonds.

A flood out of risky assets like crypto and growth stocks is natural even on a day like this. But it is more of a market dynamic than a fundamental change in the competitiveness of cryptocurrencies.

What should investors do now? I don’t think higher prices fundamentally change the disruption or development in crypto today. Cryptocurrencies such as Ethereum and Solana are based on smart contracts and companies are building with the blockchain at their core. That does not change with higher interest rates.

The reaction to the Federal Reserve’s discussion of interest rates is natural, but should not be worrisome either. Crypto is volatile, and for the past year has traded in lockstep with volatile stocks. That’s what we’re seeing today, not a worrying move based on something more fundamental.