What happened
The cryptocurrency market had a bad start to the day Wednesday and values dropped across the board. A broad sell-off caught almost every cryptocurrency and volatility continues to be normal for the industry.
As of 12:05 p.m. ET, the value of Solana ( SOL -10.13% ) was down 10.5% over the last 24 hours, Polkadot ( DOT -7.94% ) had fallen 8.9%, and Cardano ( ADA -9.73% ) had fallen 7.6%.
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So what
The stock market is down sharply today and growth stocks are tumbling as well. Cryptocurrencies have been correlated with growth stocks for most of the last year and so when there’s a big sell-off it’s not surprising to see cryptocurrencies drop.
One of the reasons the stock market is down is because interest rates are rising. In the U.S., the 10-year Treasury rate is up 5 basis points today to 2.59% and rates in developing countries are up even more. Brazil’s 10-year rate was up 18 basis points to 11.54% and Mexico was up 6 basis points to 8.49%. Cryptocurrencies are traded globally, so the increases around the world will cause investors to flee to “safer” assets.
There’s also news that the Securities and Exchange Commission (SEC) has proposed expanding its definition of an exchange and may require more traders and businesses to register with the agency. The industry has been in regulatory limbo for years and at times there are signs regulations will be light and at other times it seems like burdensome regulations are coming. This news would fall in the latter camp and for now it’s causing cryptocurrencies to lose value overall. I wouldn’t be surprised to see regulation be a cause of volatility throughout the year.
Now what
There are a lot of macro factors driving cryptocurrencies today but fundamentally I don’t see any major changes to the long-term investment thesis. The disruptive nature of crypto and blockchains still exists and money is flowing into the industry.
What also hasn’t changed is that cryptocurrencies remain extremely volatile, especially on the interest rate and economic news. With rates on the rise and the economy uncertain for the next year it’s understandable that there’s a pullback in valuations.
What I will point out about each of these cryptocurrencies is that they’re utility cryptocurrencies that enable developers to build functionality in decentralized finance, non-fungible tokens, and other markets. Long-term, this should be the best place for investors and as development grows the value of cryptocurrencies should rise as well.
For now, uncertainty has taken hold of the market and that’s what’s causing today’s pullback. But it’s nothing to be concerned about long-term because the crypto industry is maturing and becoming more valuable everyday.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
