Why are Bitcoin, Shiba Inu, and Dogecoin Experiencing a Decline Today?
Three significant digital currencies that investors keep a close eye on are currently displaying losses on the screen. As of 2:15 p.m. ET, Bitcoin (-0.96%), Shiba Inu (-11.49%), and Dogecoin (-5.59%) are leading the crypto market downward, with declines of 3.7%, 8.1%, and 7.5% respectively over the previous 24 hours.
While these drops are noticeable, they only constitute minor dents in the monthly and year-to-date gains of these tokens. Bitcoin has managed to maintain a 7% increase over the past month and a 130% rise over the past year. Shiba Inu and Dogecoin have observed monthly and annual growth of 28% and 15% respectively, while 139% and 88% respectively over the same periods.
The question on many investors' minds revolves around whether this short-term trend is a result of profit-taking and consolidation in the near future, or if there are underlying factors that may impact these digital currencies. Let's explore the elements fueling today's moves in these top three cryptocurrencies.
Near-term profit taking or structural factors?
One of the major market-related trends causing a near-term selling spree in most risk assets (including equities) are remarks made by Federal Reserve Chairman Jerome Powell today, stating, "This is not a committee that feels like it's in a hurry to cut rates quickly. ... If the economy performs as expected, that would mean to more rate cuts this year, a total of 50 [basis points] more."
Lower interest rates at a faster pace have been a key factor in the speculations surrounding stable, gold-like assets such as Bitcoin. The thinking is that reducing interest rates and weakening the U.S. dollar can increase the demand for assets like Bitcoin, which are often viewed as commodity-like in nature. Furthermore, faster interest rate cuts may hint at looming recessionary pressures, a concept that some in the "sound money" group argue is bullish for Bitcoin and related tokens.
The rise in Bitcoin and many risk assets has led to a decrease in demand for top meme tokens like Shiba Inu and Dogecoin. Today's liquidation data reveal that Shiba Inu and Dogecoin have both experienced a wave of long liquidations (or the termination of bullish investor positions), with Shiba Inu witnessing its highest liquidations since early June. Both tokens collectively saw over $5 million in bullish bets on these tokens liquidated, forcing investors to divest from these tokens and initiate selling.
Given that many of the factors at work for these three prominent cryptocurrencies appear to be short-term, it seems plausible that today's move is just a temporary phenomenon. Bitcoin's price drop in response to larger macro factors has inevitably led to losses in derivatives investors who had placed long bets on meme tokens. This is a trend that has recurred in this sphere numerous times.
Is it purely an interest rate play?
At the moment, the market appears to be more preoccupied with monetary policy, an attention it has shown for several years now. Interest rates can have a more substantial effect on the valuations of higher-risk assets, and due to their higher volatility, these three cryptocurrencies offer significant upside potential when the market views monetary policy actions favorably. Conversely, when the market perceives monetary policy actions negatively, the inverse happens.
Currently, investors appear to be skeptical of the idea that the Fed may not act aggressively enough on its cutting cycle, as it did during its hiking cycle. Additionally, with various tokens typically experiencing elevated returns in the last quarter of the year, it's my view that speculative capital can easily flow back into these assets if these headwinds turn out to be short-lived.
In light of these market movements, some investors might consider diversifying their finance portfolio by investing in other digital currencies to mitigate potential losses. Regardless of these short-term fluctuations, the long-term investing strategy for Bitcoin, Shiba Inu, and Dogecoin remains promising, considering their significant monthly and yearly gains.
Furthermore, while the decline in demand for top meme tokens like Shiba Inu and Dogecoin might be attributed to the rise in Bitcoin and other risk assets, the potential for these tokens to rebound remains high, especially with speculative capital often flowing back into these assets during the last quarter of the year.
