This week saw a significant drop in the value of various alternative cryptocurrencies, or altcoins.
Over the recent months, crypto has been gaining momentum due to anticipation that the Trump administration would soften regulations on the sector and offer clarity to developers and business owners in the Blockchain field. This optimism has propelled prices upwards, yet it's also attracted a wave of speculation and FOMO in the crypto market. However, this trend turned around this week as all significant coins, including altcoins, experienced substantial declines in value.
As per information supplied by S&P Global Market Intelligence, notable drops have been observed in the value of various altcoins. For instance, Polkadot (DOT) (-2.28%), dropping by 21.6% over a 7-day period until 1:30 p.m. ET on Friday, Avalanche (AVAX) (-2.12%) with a 23.3% decrease, Internet Computer (ICP) (-2.26%) experiencing a 22% decrease, and Near Protocol (NEAR) (-1.73%) with a 24.2% drop. Amidst expected low trading volume during the upcoming two-week period, this might just be the beginning of the market's volatility.
The Fed's influence
The essential factor triggering this week's changes was the Federal Reserve, which reduced interest rates by 0.25% on Wednesday. Despite this reduction, investor sentiments remained uncertain, causing long-term interest rates to escalate. Increased long-term rates influence the valuation of growth stocks and speculative assets such as cryptocurrencies, leading to shrinking values in recent days. Interestingly, the value of crypto still appears to be directly related to growth stocks, rather than acting as a hedge against market fluctuations or inflation.
Skepticism prevailed among investors regarding the Fed statement, particularly with predictions of rising inflation and unemployment levels in 2025, indicating a weakened economy. The surge in crypto values has been powered by market liquidity and optimistic expectations for the economy, meaning a shift in sentiment towards a weaker economy will have more severe impacts on crypto than stocks.
The prospect of the Blockchain
To substantially increase the value of altcoins, investors require evidence of increased utility and innovation on the blockchain. The ultimate goal of creating an affordable and functional Blockchain with smart contracts, decentralized finance, and other practical applications is to create value across the entire ecosystem. Although advancements in this field have occurred during the past three years, further progress needs to be made, and not every Blockchain will equally benefit from these developments.
The speculation that pushed up values over the past two months may not prove to be the fundamental driving force. Once the hype dies down, so might the valuations.
A long-term perspective in crypto
Although there are still numerous potential bullish factors for cryptocurrencies, they may take some time to manifest. Clarity in regulations could open doors to more blockchain innovation, potentially resulting in significant value gains. Furthermore, the listing of more digital assets as exchange-traded funds (ETFs) or on centralized exchanges is another possible growth catalyst.
Although the crypto industry may still have a promising future, the recent growth trajectory may not have been sustainable. A significant influx of funds entered the industry on hopes of regulatory changes leading to value creation, but any tangible effects could take months or years to materialize. Volatility will continue to be common in the altcoin market as trading volume is likely to be low during the holiday season.
In light of the Federal Reserve's interest rate reduction, investors have expressed uncertainty, causing long-term interest rates to rise and negatively impacting the value of speculative assets like cryptocurrencies. (The Fed's influence)
To ensure the sustained growth of altcoins, there is a need for tangible evidence of increased utility and innovation on the blockchain, such as the development of decentralized finance and smart contracts. (A long-term perspective in crypto)
