Cryptocurrency markets have been on a rollercoaster since the collapse of stablecoin Terra last month, but the biggest fear right now in the land of crypto and other financial markets is accelerating inflation. world, suggesting that the round of white joints should continue.
While most major tokens were up around 5% overnight, prices during trading in Asia quickly shed those gains, with Bitcoin shedding 5.5% and Ethereum 11%. Bitcoin has lost around 55% of its value since the start of the year to trade at US$20,592 at press time. The non-fungible token (NFT) market has not escaped the crisis.
Just last week, markets had forecast a 50 basis point interest rate hike by the US Federal Reserve to contain inflation at its monthly meeting today. But speculation now is that the Fed could hike as much as 100 basis points, after Friday’s consumer price index (CPI) showed May year-on-year inflation at 8.6% in the United States – its highest level in 40 years.
Read more: Bitcoin and Ether bear the brunt of the market selloff amid fears of a Fed rate hike
But the Fed faces a difficult balancing act to avoid plunging the economy into a recession; with billions of dollars of bonds on its books thanks to quantitative easing, going too fast will drive up debt repayments.
“The Fed wants to try to show steady progress rather than induce a moment of shock and awe for the market,” said market analyst and former stockbroker Andrew Sullivan. “Because, as we saw on Friday, if that happens markets tend to crash and that’s not good for anyone.”
Markets took a beating over the weekend following the release of CPI data, with the crypto market capitalization dropping around 25% to fall below US$1 trillion for the first time since January 2021, according to data from CoinMarketCap.
Stock markets were also hit hard, with the S&P 500 falling 3.9% on Monday, confirming that it was officially in a bear market.
Raising rates is the primary tool central banks have to combat rising inflation by raising the cost of borrowing to cool an overheated economy. As markets focus on what Fed Chairman Jerome Powell will do today, the focus will also be on what he indicates to come.
“A lot of it will come down to how Powell explains it, he’s been very good at trying to give forward guidance so the markets don’t get upset,” Sullivan said.
Crypto markets have other specific concerns.
Investors still stunned by the estimated US$40 billion implosion of stablecoin Terra face the threat of repeat performance as another algorithmic stablecoin, USDD, lost its peg to the US dollar. The loss in dollar parity started the chain of events that led to the Terra debacle in early May.
In an attempt to regain USDD parity with the US dollar, the TRON Decentralized Autonomous Organization (DAO) said it had added $500 million in USDC to its reserves, which have been at a standstill for around two days.
Read more: TRON Founder Pledges US$2 Billion Defense Fund After USDD Stablecoin Loses Dollar Parity
TRON founder Justin Sun said on Monday that he was setting up a US$2 billion fund to defend the coin, but at press time USDD was trading at US$0.9635.
If further turmoil was needed, crypto staking and lending platform Celsius Network on Monday suspended withdrawals, trades and transfers for all users, citing “extreme market conditions.”
The network said it was working as quickly as possible to resolve the issue, although it did not say when transactions would resume.
The crypto roller coaster is also wreaking havoc on the non-fungible token (NFT) market, with sales figures for June dropping sharply.
Sales reached $3 billion in May, but as of mid-June sales have yet to reach $500 million, according to data aggregator NFT CryptoSlam.
The floor price of a Bored Ape Yacht Club NFT has fallen below US$100,000 for the first time since August 2021. The current floor price is 78.5 ETH, or approximately US$88,500.
“I don’t know anyone right now who is actually buying NFTs,” said Yehudah Petscher, NFT relationship strategist for CryptoSlam. Forkast in an interview. “I don’t think most NFT projects will survive this bear market,” he said. “I think it’s the biggest.”
What about bitcoin? Ben Caselin, head of research at crypto exchange AAX, said Forkast he remains bullish on bitcoin as he has proven his fundamentals to be strong time and time again.
The war in Ukraine has proven to be resilient to government controls, he says, while his hedge rhetoric against inflation will win out in the long run, especially after periods of heightened inflation.
“We will see some dominance return to Bitcoin and we will see some altcoins die off,” Caselin said, “and rightly so.”