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Why Crypto's Altcoins Plunged This Week
Crypto has been hot over the past few months on the back of hope that the Trump administration would ease regulations on the industry and give clarity to developers and entrepreneurs on the Blockchain. That's driven prices higher, but it's also brought in a lot of speculation and FOMO to the crypto market. Some of that reversed this week as all major coins, including altcoins, dropped significantly in value.
According to data provided by S&P Global Market Intelligence , Polkadot (CRYPTO: DOT) has fallen 21.6% over the past week as of 1:30 p.m. ET Friday, Avalanche (CRYPTO: AVAX) is off 23.3%, Internet Computer (CRYPTO: ICP) is down 22%, and Near Protocol (CRYPTO: NEAR) is off 24.2%. Heading into a two-week period when volume will likely be low, this could be just the start to the market' volatility.
The Fed's cut
The biggest driver of the moves this week was the Federal Reserve, which lowered interest rates by a quarter point on Wednesday. But that was met with skepticism by investors who pushed long-term interest rates higher. Long-term rates drive the valuation of growth stocks and speculative assets like cryptocurrencies and that's why values dropped this week. Ironically, crypto still moves in a correlated manner to growth stocks, rather than being a hedge against the market or inflation.
What the market saw as concerning in the Fed statement were predictions for higher inflation and higher unemployment in 2025, which would indicate a weakening economy. Crypto values have been driven up by excess liquidity in the market and investors being bullish on the economy's future, so a reversal in that view will punish crypto, even more than stocks.
The future of the blockchain
What investors need to see is more utility and innovation on the blockchain that will ultimately drive demand and value to these altcoins. The entire purpose of building a Blockchain that's low-cost with smart contracts, decentralized finance, and other utilitarian features is to be able to generate value for the entire ecosystem. There have been developments on that front over the last three years, but more needs to be done and not every Blockchain will benefit equally.
Speculation that drove values of over the past two months isn't going to be that fundamental driver and if hype dies off so could valuations.
A long view is still needed in crypto
There are still plenty of potential tailwinds for cryptocurrencies, but they may take time to play out. I think clarity in regulations could allow for more innovation on the blockchain and that could drive significant value. There's also the potential listing of more digital assets as exchange-traded funds (ETFs) or on centralized exchanges.
I think the future is still bright for the crypto industry, but the last few weeks of moves higher may not have been sustainable. A lot of money flowed into the industry on hope that regulatory changes would drive value, but any real impact could be months or years away. A pullback is normal and with volume likely to be light over the holidays, volatility will be the norm for altcoins as well.
Before you buy stock in Polkadot, consider this: