Why Ethereum Is Sinking Today

Key Points

• Investors are taking profits on cryptocurrencies after a strong rally last week.

• Ethereum and other tokens have seen strong gains this year thanks to political and macroeconomic catalysts, and today's sell-off is modest in the grand scheme of things.

• Inflation news could be the most important near-term catalyst for Ethereum and other cryptocurrencies.

• 10 stocks we like better than Ethereum ›

Ethereum (CRYPTO: ETH) is heading lower in Monday's trading. The cryptocurrency's token price had fallen 2.2% over the past 24 hours of trading as of 3 p.m. ET. Bitcoin's token price had fallen 0.8% over the same stretch.

The cryptocurrency market hit its highest-ever valuation level last week, and Ethereum reached its highest token price in four years. Investors are selling to take profits following the recent rally and looking at some potential risk factors that could disrupt bullish momentum.

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Ethereum pulls back from recent highs

Ethereum and other cryptocurrencies surged last week after President Trump signed an executive order that allows for crypto tokens and other nontraditional assets to be included in 401(k) accounts. The development suggested a significant new buying catalyst for the crypto market, but some investors are now repositioning on the heels of the rally.

Expectations that the Federal Reserve will serve up multiple interest rate cuts this year have helped fuel strong bullish momentum for cryptocurrency valuations, but the Producer Price Index (PPI) report published by the Bureau of Labor Statistics (BLS) last week arrived with higher-than-anticipated inflation. The Fed is still expected to issue a rate cut at its meeting next month, but July's PPI data is causing some jitters in the market.

What's next for Ethereum?

The Trump administration's support for the crypto industry will likely continue to be a positive catalyst for Ethereum and other crypto tokens. Along with the Genius Act stablecoin legislation that was passed by Congress and signed by President Donald Trump last month, the House of Representatives also passed the Clarity Act -- which establishes regulatory frameworks for the broader crypto market. The Clarity Act is now awaiting discussion and a vote in the Senate, and it seems to have a solid chance of passing.

While political dynamics appear to be favorable for Ethereum right now, there are still some big questions on the table. Developments on inflation and interest rates will continue to play key roles in shaping the token's valuation moves, and investors will be watching closely to see if the higher-than-expected PPI inflation shows up in other areas of the economy.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.