Why Bitcoin Was Sinking on Wednesday
Key Points
The prospects for interest rate cuts in the coming months seem to be fading.
That's not great for any cryptocurrency, especially the most popular one.
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One of the key market drivers for cryptocurrencies is interest rates. All things being equal, when they're on the way down, investors get more excited about digital coins and tokens. Conversely, when they stay level (or even rise) that sentiment can quickly turn negative.
On Wednesday the U.S. Federal Reserve (Fed) kept its key interest rates unchanged, and the latest economic data suggested there isn't much scope for cuts in the near future. So it wasn't surprising that the No. 1 cryptocurrency, Bitcoin (CRYPTO: BTC) led the way with a nearly 5% decline over the 24 hours prior to 4 PM Eastern time.
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Foiled by the Fed
The interest rate calculation is a rather simple one; when rates go down, the yields of so-called "safe assets" like government bonds decline. This, in turn, makes riskier investments -- hello, cryptos! -- more appealing. Investors like the potential bounce they can offer, in favor of a predictable yield that's heading south.
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So many crypto-heads didn't get what they wanted with the Fed's Open Market Committee (FOMC) decision to leave its benchmark Federal Funds Rate untouched at 3.5% to 3.75%. Inflation seems to be an increasing threat to the economy, as the Fed raised its year-end inflation forecast to 2.7% from 2.4%.
That was on the back of the largest monthly rise in the producer price index (PPI) in more than two years. That key inflation indicator rose by 0.7% in February.
Interest rate blues
These increased forecasts don't bode well for interest rate hawks, and, in turn, they're going to dampen enthusiasm for all manner of cryptocurrencies. Bitcoin has been rather beaten down lately, and Wednesday's dip might have it approaching an attractive low. However, the market's likely to remain gloomy about these economic headwinds for some time, so I'd avoid Bitcoin just now.
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Eric Volkman has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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