Cryptocurrencies retreated after yesterday's sharp gains, as the Federal Reserve is nearing the end of one meeting this year and could cut interest rates by 25 basis points. As of 11:53 a.m. Et on Wednesday, bitcoin was trading around $104,170.
Meanwhile, the price of XRP, the world's third largest cryptocurrency, has fallen by more than 5% since late yesterday afternoon. Meme tokens Dogecoin and Shib were trading 4.3% and 4.6% lower, respectively.
This week, after President-elect Donald Trump said he wanted to create a strategic Bitcoin reserve like the national Strategic Petroleum Reserve, the price of cryptocurrencies, especially Bitcoin, rose. Strategic reserves are the accumulation of specific resources, such as commodities, that can be used to affect supply or in case of an emergency.
It's not clear how such a reserve would work, but the government currently has about 200,000 bitcoins worth about $21 billion, which could be the starting point for a strategic reserve.
MicroStrategy, a data company founded by Michael Saylor and a public holder of Bitcoin, has now joined the Nasdaq 100 index. These events pushed the cryptocurrency above $107,000 yesterday.
However, traders may have locked in some gains earlier today in anticipation that the Fed will conclude its first meeting of the year. Going into the meeting, almost all investors expected the Fed to cut rates by 25 basis points.
But more attention is likely to be paid to the Fed's message, which could turn hawkish given that the labor market is still strong, inflation is still above the Fed's preferred 2% target, and Trump's policies such as tariffs are likely to fuel inflation. That could put further rate cuts at risk next year, and Bitcoin and cryptocurrencies in general rose sharply on the rate cut news.
In more token-specific news, Ripple, the company behind XRP, this week launched its highly anticipated stablecoin RLUSD, which tracks the U.S. dollar. Earlier this week, Ripple said: "Each RLUSD token is fully backed by US dollar deposits, US government bonds and cash equivalents - designed to ensure its stability, reliability and liquidity."
RLUSD can be used on the Ethereum blockchain or the XRP ledger. Since it will generate more traffic on the XRP ledger, investors also bought XRP tokens earlier this week in hopes of getting their hands on the stablecoin, according to Fortune. The price of XRP rose yesterday, but is in trouble today along with the entire industry.
Today, much of what is driving the cryptocurrency industry seems to be related to the macro environment. Many see Bitcoin as a hedge against inflation. However, the performance of the broader sector is largely similar to that of growth stocks, performing better in a risk environment and worse when interest rates and inflation rise. This is why the direction of interest rates next year will likely affect most cryptocurrencies.
XRP is one of the few tokens I hold, and I think it has strong potential because of its fixed supply and efficient network. Its ties to Ripple and RLUSD could also be positive.
Not interested in Dogecoin and Shiba Inu at the moment because they lack utility and do not yet have the ability to hedge against inflation. Most altcoins are highly volatile, so you shouldn't invest too much in any single token.