Why Bitcoin, Ethereum and Dogecoin are falling today

Major cryptocurrencies retreated this morning after rallying over the weekend as the market turns its full attention to the upcoming Federal Reserve policy meetings on Tuesday and Wednesday, which are expected to culminate in the first rate cut since beginning of 2020.

The world’s largest cryptocurrency, Bitcoin (BTC -3.76%)traded nearly 3% lower. In comparison, the second largest cryptocurrency in the world, Ethereum (ETH -4.31%)and the meme symbol Dogecoin (DOGE -5.48%) both fell 5.8%.

No apparent reason

There was no obvious reason behind the move this morning, although the crypto may be taking a breather after rallying this weekend and the Fed meeting is still shrouded in mystery. The big question is whether the Fed will cut rates by 25 or 50 basis points.

Recently, traders have become more optimistic about the higher discount, with CME GroupHis FedWatch tool that shows 61% of traders are betting on a 50 basis point cut. It’s more than a 50-50 split on Fridays. It is surprising to see cryptocurrencies down, as lower interest rates tend to favor riskier assets and lead to a weaker dollar, both of which are conditions where cryptocurrencies have historically performed well.

However, many are divided on what will come out of the Fed meeting and the future trajectory of interest rates. (Remember, investors are always looking ahead.)

“The reduction is less important than the signaling during the press conference and the release of the updated point chart,” Sean McNulty, director of trading at liquidity provider Arbelos Markets, told Bloomberg this morning. “If the guidance and press conference are significantly favorable, we would expect Bitcoin to outperform.”

Others aren’t convinced the Fed has fully won its war on inflation, despite a 2.5 percent August reading in the Consumer Price Index last week. Just last week, of JPMorgan Chase CEO Jamie Dimon said he would not completely rule out stagflation — high unemployment and high inflation — which he considered the “worst outcome” for the economy.

Dimon hasn’t always been right with his economic forecasts — he suggested last year that interest rates could hit 7%. He’s not one you want to bet against, though, given his track record. He also correctly positioned JPMorgan to hold cash earlier in the cycle, rather than investing heavily in long-dated, low-yielding securities like other similar banks.

This prospect should be viewed favorably by crypto investors

Given the heightened prospects for a half-point increase on Wednesday, I’m surprised to see crypto trading lower this morning. Again, the industry has largely performed well under lower interest rates and a weaker dollar. However, crypto can be very volatile, so predicting the daily movement of individual tokens is a fool’s errand.

I continue to see Bitcoin and Ethereum as crypto tokens that investors can hold at least a small portion of in their portfolios. Bitcoin has a limited supply and can serve as a hedge against inflation. Ethereum has strong real-world utility given the technology behind its network. Both have also seen increased liquidity with the introduction of exchange-traded funds. I do not recommend holding any real position in Dogecoin. I don’t see any compelling features of the token other than a speculative advantage fueled by social media.