There is a reason savvy cryptocurrency investors keep a sharp eye on the broader economy: It can directly and profoundly affect their holdings, more so than for many stocks. There are numerous reasons for this, not least that even the most popular coins and tokens are considered very speculative investments.
Happily for those folks, the economic winds blowing on Wednesday seemed to be favorable, and many altcoins rose in price. These included Bitcoin Cash, its cousin Bitcoin SV, and Stacks. In the 24 hours leading up to midafternoon, the trio was up 11%, 8%, and 13%, respectively.
At first glance, the macroeconomic news pushing coins and tokens higher wasn’t particularly uplifting.
Wednesday morning, the U.S. government’s Bureau of Economic Analysis made a downward revision to its estimate for second-quarter growth in gross domestic product (GDP). It now believes our economy rose by 2.1% during the period, some distance below the bureau’s initial 2.4% calculation.
Now, why would an otherwise bullish crypto investor cheer a lowered estimate, instead of worrying what it meant for the future?
Because a lower trailing GDP figure theoretically reduces the chances that the Federal Reserve will raise interest rates in the future. Or, at least, that the Fed will do so more incrementally and/or slowly than anticipated.
Cryptos, being considered speculative investments (and often highly speculative, at that), are assets that can be very sensitive to potential interest-rate changes.
Although it’s a generalization, when rates move upward, many market players tend to sell out of the speculative stuff and allocate more to assets considered safer: government and big-name corporate bonds, for example, or blue chip stocks.
Contrarily, stagnant or even declining interest rates usually increase the investor appetite for risk. It’s no wonder, then, that Bitcoin Cash, Bitcoin SV, Stacks, and a clutch of other altcoins popped higher on the bureau’s revision.
This isn’t to say that all is free and clear for the lower-capitalized and (to many) more-esoteric coins and tokens on the market.
Some Fed officials opined recently that more interest rate hikes will probably be necessary to quash inflation. As long as prices are rising, we can expect this plan to be put into action. Inflation remains the big worry of monetary officials these days, and even a notable downward revision of GDP growth isn’t likely to change that.
A change in sentiment/strategy might occur if GDP shows more serious and sustained indications of slowing down, however. Considering that, all crypto investors should continue to train those wary eyes on the latest macroeconomic data and projections.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.