Bitcoin is dragging down cryptocurrencies due to strong US economic data

The irony of the cryptocurrency market is how low it can be when the economy is doing well. On Tuesday, two important economic readings came in better than expected Bitcoin (Bitcoin -5.20%) And other cryptocurrencies that have been dropped in the news.

As of 4:30 PM EST, Bitcoin is down 4.9% over the past 24 hours. Ethereum (Ethereum -7.94%) It was off at 7.4% and Dogecoin (Doug -10.77%) Decreased by 8.9%. Momentum appears to be putting more downward pressure on the market, so these declines may worsen as the US stock market closes.

Good economy, but bad for cryptocurrencies

The ISM Services PMI – which measures services, orders, backlog, business activity and other elements – rose to 54.1 in December from a reading of 52.1 in November. A reading above 50 indicates economic expansion, so this was a bullish reading for the economy.

The other reading was job openings from the Bureau of Labor Statistics, which came in at 8.1 million, up from 7.8 million and beating economists’ estimates of 7.7 million.

Both of these are strong economic indicators, but they also come with warnings that businesses are concerned about rising costs and inflation. This could lead to the Fed being less accommodative in 2025 and possibly raising interest rates if inflation rises.

Cryptocurrencies, especially Bitcoin and meme coins like Dogecoin, are closely linked to risky assets like growth stocks. When investors speculate that interest rates will rise, the value of these assets declines. Not surprisingly, growth stocks also fell today.

Bitcoin and cryptocurrencies were taken by surprise

This better-than-expected news left cryptocurrency investors unprepared, leading to $457 million of long positions being liquidated as the value dropped. Cryptocurrencies can often be traded with high leverage, and if this leverage is eliminated when values ​​move higher or lower, it can amplify the underlying market trend.

Bitcoin has not proven to be the inflation hedge it was sold as. Instead, it fell when inflation was highest, then rose over the past two years as inflation declined. It doesn’t look like this trend will change any time soon.

Crypto incentives are fading

The catalysts that drove the cryptocurrency rally in the fall of 2024 are also beginning to fade. Investors believe that the election will lead to reduced regulations in the US and a more certain operating environment for cryptocurrency companies. This may still be the case, but it will likely take months or years for real innovations to impact the cryptocurrency market.

And even when that happens, Bitcoin and Dogecoin may not be where the innovation happens. I think a blockchain like Ethereum is the most likely to benefit from blockchain innovation, but even then, the token itself may not benefit.

Advances in stablecoins, fast and low-cost blockchains, and layer 2 solutions built on top of Ethereum will likely be where developers will build in 2025. This could help the cryptocurrency space in general without driving new investors into these tokens. The catalysts and speculation for 2024 are starting to fade, and this is hurting cryptocurrencies across the board today.