XRP spearheaded a notable crypto slump, reflecting broader financial markets' reaction to a robust U.S. dollar, which exerted pressure on global currencies and cryptocurrencies alike. As the dollar strengthened, XRP nosedived over 5% in the past 24 hours, with dogecoin (DOGE), Solana’s SOL, ether (ETH), and BNB experiencing declines of up to 2%. This market volatility saw overall crypto market capitalization contract by 3% alongside a 3.5% drop in the CoinDesk 20 index, which monitors the largest cryptocurrencies excluding stablecoins.
U.S. equities witnessed a downtick on Friday as investors reduced their positions amid year-end uncertainty. In the Asia Pacific region, an index reversed a five-day gain streak, while U.S. futures for the S&P 500 and Nasdaq hinted at similar losses during the U.S. trading session as of Monday afternoon in Asia. Historically, Bitcoin has tended to move inversely to the U.S. Dollar Index (DXY), which measures the dollar’s value against other major fiat currencies such as the euro.
The dollar’s recent rally is largely attributed to anticipation of policy measures from President-elect Donald Trump, who has committed to implementing economic growth-focused policies upon taking office in January. A stronger dollar usually shifts investor preference towards dollar-denominated assets like U.S. Treasuries and equities, which tend to perform better in such conditions compared to cryptocurrencies.
This shift has tempered expectations of a sustained cryptocurrency rally, particularly given reduced liquidity and typical year-end profit-taking behavior among investors.
The anticipated "Santa rally," which usually brings bullish trends in December, has failed to materialize as Bitcoin prices fell close to 4% this month, despite a 47% rise in the final quarter.
Concurrently, reduced hopes for ongoing interest rate cuts by the Federal Reserve have also weighed on Bitcoin and other cryptocurrency prices over recent weeks. Despite these headwinds, some market participants remain hopeful about positive long-term crypto policy impacts. Maksym Sakharov, co-founder of WeFi, expressed optimism to CoinDesk, suggesting that recent sell-offs are reactions to macroeconomic uncertainty, not a peak in Bitcoin and altcoin prices.
Sakharov noted that the Federal Reserve's anticipation of higher figures next year, even as inflation hovers near the 2% target, could alter monetary policy directions and influence market trends. He further opined that the inauguration of President-elect Trump may usher in more corporate interest in the Bitcoin ecosystem due to potentially favorable regulations.
Should these predictions come to fruition, Bitcoin might decouple from the macroeconomic elements that have historically driven its volatility, Sakharov concluded.