“We’re seeing a bit of a sell-off in AI,” Carlos Guzman, vice president of research at crypto trading firm GSR, told Decrypt. “Crypto is reacting to that risk-off sentiment.”
Investors now appear to be digesting a firming consensus around rate hikes, Guzman said, following a stretch of gains for tech stocks that had been resilient despite geopolitical tensions in the Middle East that stoked heightened macroeconomic uncertainty.
The drop also follows Kevin Warsh’s first remarks as Federal Reserve chair, in which he signaled last week that the U.S. central bank would shift its focus away from providing markets with forward guidance, while underscoring its dedication to taming inflation.
“If people think that we’re going into a hawkish environment, that can certainly hurt near-term prices for crypto and other risk assets,” he said. “It’s a challenging environment that people are trying to make sense of in terms of what the new Fed chair is going to be like.”
In a Monday note, economists at Bank of America began projecting three hikes this year, lifting interest rates to a target range of 4.25% to 4.5% by year’s end. Typically, higher rates weigh on risk assets, as the risk-free payouts on government debt become relatively attractive.
Although crypto prices have proved tepid for months, O’Shea argued that there are two catalysts that could jumpstart the market this year. He pointed to further de-escalation in light of a memorandum of understanding between the U.S. and Iran, as well as the Clarity Act.
Still, time is ticking for lawmakers to pass the sweeping bill that would bring further legitimacy to the crypto industry, while establishing jurisdictional boundaries between regulators, before their focus is consumed by fast-approaching midterm elections in November.
