It was a sea of red across multiple asset classes this week, with stocks and cryptocurrencies experiencing epic-style collapses. The crypto market slump was largely driven by fears of regulatory bottlenecks after India sounded the alarm on illicit financing. On Wall Street, concerns over rising interest rates put the major indexes on track for their worst weekly performance in two years.
Carnage Hits Crypto Market
The violent selloff that has rocked cryptocurrencies since January continued this week, as bitcoin and the major altcoins shed hundreds of billions in market cap. The market appears to have bottomed on Friday at roughly $348 billion, which was the lowest since early December.
At press time, the total market capitalization for all coins was roughly $417 billion.
Bitcoin led the massive reversal, falling 21% over five days to trade as low as $8,530. The world’s top cryptocurrency by market cap was last seen trading around $8,780. Its share of the total market increased slightly toward the end of the week, reaching a high of 37.5%.
Digital currencies have been on edge ever since South Korea announced plans to introduce stricter regulations on the market. Those efforts amounted to a ban on anonymous trading accounts, which went into effect Jan. 30.
Earlier this week, India’s Finance Minister said his government will scrutinize more closely black market activity involving cryptocurrency. Media outlets erroneously took this to mean that the government was “killing” the crypto market.
Even if we ignore fake news, investors still have reason to be alarmed. The cryptocurrency market continues to be infested by cyber criminals targeting exchanges as well as ICOs. On Thursday, Bee Token became the latest crowdfunding campaign to get attacked (this time, it was a phishing scam targeting emails and Telegram).
Rising Interest Rates Trigger Equity Rout
U.S. stocks posted heavy losses on Friday, with the Dow Jones Industrial Average recording its first 600-point drop in two years. Though slumping all week, equities sold off more intensely Friday after government data showed a surprise pickup in wages.
Average hourly earnings for U.S. workers climbed 2.9% annually in January, the Labor Department reported Friday in its monthly nonfarm payrolls data series. That was the fastest increase in more than eight years, a tangible sign that inflationary pressures are building and that the Federal Reserve will move to raise interest rates more intently.
The report also showed that overall employment rose by a faster than expected 200,000 as joblessness held steady at 4.1%.
Stocks are reversing sharply from their best start to a year in decades. The CBOE VIX, a measure of 30-day volatility, rose on Friday to its highest level since 2016. The VIX closed the week at 17.31, where it was seen inching closer to its normal historic range.
U.S. monetary policy was left unchanged this week, as the Federal Reserve concluded its final rate meeting under the guidance of Janet Yellen. Beginning this month, the central bank will be headed by Jerome Powell. He will chair his first Federal Open Market Committee (FOMC) meeting in March.
That’s when the central is expected to raise interest rates again, based on the 30-day Fed Fund futures prices, which gauge the market’s outlook on monetary policy. The Fed is keeping a close eye on inflation, and will likely press forward with additional rate hikes to ensure price growth doesn’t overstep its 2% target.
Policymakers use the core personal consumption expenditure (PCE) index to gauge inflation. On Monday, the Commerce Department said the inflation measure fell to 1.7% annually in December, down from 1.9% the previous month.
The Week Ahead
The major question heading into next week is whether cryptos and stocks are experiencing a momentary correction or a more protracted downturn. For cryptocurrencies, it appears to be the former. Market fundamentals haven’t changed very much since the start of the year, when the total capitalization blew past $800 billion.
Investors are cautioned against reading too much into the media hysteria. As we wrote on Thursday, the mainstream media outlets have successfully talked down cryptocurrencies on several occasions. This is unlikely to change anytime soon as more governments consider regulating the crypto sphere.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.
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