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Why cryptocurrencies are selling off today

Why cryptocurrencies are selling off today
Written by Publishing Team

Yahoo Finance’s Jennifer Schonberger discusses the outlook for cryptocurrency prices after the Fed released a white paper on central bank digital currencies.

Video Transcript

All right, so as we pay attention to what’s happening in the Crypto Corner, a lot of us remember the comedian George Carlin who had seven words you could not say on TV. And if you’re a crypto investor, you’re probably uttering some of those words now, watching what’s going on. Thank you very much, Federal Reserve.

With a paper that doesn’t necessarily have a definite course as of yet, what does all of this mean? Jennifer Schonberger covers crypto for us. And can we blame the Fed, Jen, for what we’re witnessing in the drop in cryptos today?

JENNIFER SCHONBERGER: Hey, there, Adam. Yeah, it’s a consortium of issues today. The Fed may be contributing to that. But when it’s risk off and stocks sell off, so do cryptocurrencies. Bitcoin and other cryptocurrencies are now more highly correlated with stocks since the onset of the pandemic and even more so since this past fall.

Take a look at a chart of Bitcoin today, falling below that 38,000 level, now off more than 11%, as crypto is in the red across the board to close this week. That is, the Dow is off more than 1% and the NASDAQ off more than 2%. In general, crypto has been under pressure as the Federal Reserve looks to raise interest rates. And the sell off in big tech stocks is prompting investors to liquidate positions in their crypto holdings to limit those overall losses.

Jeff Sica, founder of Circle Squared Alternative Investments tells me, quote, “Hedge funds and institutions that have paired cryptocurrency with tech stocks and have the highest percentage of leverage ever are being forced to raise cash quickly to reduce leverage and cover future margin calls as the market sells off. This tight correlation between crypto and tech has created this undoing.” He says he’s tempted to buy, but not quite yet.

Also driving today’s action, Russia’s central bank Thursday proposed banning cryptocurrencies just after regulators in the UK, Spain, and Singapore this week toughened rules on crypto, this all coming just a day after the Federal Reserve took its first step towards potentially pursuing a central bank digital currency. For that to move forward, the Fed must design a CBDC and a way that meets approval of Congress and the White House.

Congress generally appears open to authorizing a CBDC, though the Fed will need to sort through details to satiate both parties. A White House Representative did not immediately respond to Yahoo Finance’s request for comment.

Senate Banking Committee Chairman Sherrod Brown called the Fed’s report a good first step towards the digital dollar, while Republican Senator Pat Toomey, ranking member on that Senate Banking Committee, says he’s encouraged by the report but concerned about how the Fed will protect Americans’ privacy . And Adam, with many traders in the cryptosphere hiding out in stablecoins now as they sell off, a CBDC could be a competitor for those private stablecoins, especially during times of market volatility and sort of a go to safe haven.

According to an analyst at Chainalysis, if we were to adopt a CBDC, it would have virtually zero credit and liquidity risk and would be widely accepted by the financial system, so could be a game changer here certainly and could be contributing to some of the sell off that we’re seeing across the crypto space today. Adam.

Jen, you’ve just given us the first question for a little bit later on. We have a guest coming on who is going to talk about the fact that cryptos are now part of IRAs, and perhaps people who are investing for their retirements want a little bit of a guarantee, like the one you just outlined, if we do get a central bank digital coin. Jen Schonberger, thank you very much.

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