The crypto market took it on the chin early on Friday and it wasn’t the industry’s fault. Instead, it was weak economic data that caused the sell-off. If you’re wondering why cryptocurrencies aren’t a hedge against the economy and inflation, you only need to look at history. The last time the economy slowed and inflation jumped, Bitcoin’s value collapsed.
As of 1:30 p.m. ET, in the last 24 hours Bitcoin (BTC -4.09%) is down 3.6%, Ethereum (ETH -6.95%) is off 6.3%, and Dogecoin (DOGE -5.75%) is down 4.9%. Could the decline continue?
Crypto’s economic reality
Like it or not, cryptocurrencies trade more correlated to growth stocks than they do as a hedge against inflation or the broader economy. In general, low interest rates are good and higher interest rates are bad. In a related note, low inflation is good for crypto and high inflation is bad.
Bitcoin, in particular, has been sold as an inflation hedge, but history says it’s the opposite.
Bitcoin Price data by YCharts
And that brings us to economic data that came out today. The PCE price index, which measures personal consumption expenditures, rose an expected 2.5% from a year earlier, as expected, but core PCE was up 2.8% and January’s core PCE was revised upward. This was ahead of any impact tariffs may have on the price of goods in the future.
Higher prices put pressure on the Federal Reserve, which would like to boost the economy with lower rates, but may need to raise rates to offset inflation. It’s in a tough position and higher rates would likely be bad for cryptocurrency valuations.
Consumers are already feeling nervous
Another data point today was the University of Michigan’s consumer sentiment index, which dropped to a reading of 57 in March and the Conference Board’s Expectations Index fell to 52.6. A higher reading means consumers are getting more bullish on the economy while a lower reading shows the opposite.
Lower confidence and higher prices are a bad combination for the market, especially risky assets like crypto.
Why crypto’s collapse may not be done
The reality for crypto investors is the worst may still be ahead. It looks like higher prices are here to stay given rising tariffs and a potential trade conflict with seemingly every country that supplies the U.S. with goods.
A weaker economy and higher inflation would likely be terrible for cryptocurrency values. Crypto is a risk asset and it doesn’t have any real utility today, so if people need funds they’re likely to either sell crypto or at the very least buy less. And with no underlying business, cryptocurrency values rely on the next buyer to remain viable. Buyers could dry up in a bad economy.
I also think the tailwinds that drove the crypto recovery late in 2024 haven’t resulted in a fundamental change in the industry. Bitcoin, Ethereum, and Dogecoin aren’t accepted any more by businesses than they were and the real momentum is in stablecoins, which use the blockchain but don’t have the volatility of cryptocurrencies.
I don’t think the sell-off is over and it may be a while before the economy and market hit bottom.
Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
