Crypto Market Rocked by Inflation Data, But the Real Threat May Be Coming from Stablecoins

It's been a volatile week for the crypto markets, only for most tokens to go almost nowhere. Bitcoin (BTC) is up 5.6% in the past 24 hours as of 4 p.m. ET, but it's only up 0.9% in the past seven days.

Major cryptocurrencies rebounded on Friday, gaining ground after a sell-off earlier in the week sparked by inflation data.

Bitcoin (CRYPTO: BTC) rose 4.25% in the past 24 hours to $26,037 as of 4 p.m. ET. The world's largest cryptocurrency by market capitalization was up just 0.9% over the past seven days.

What Happened: The gains came after a volatile week for crypto markets, with most tokens barely budging. Ethereum (CRYPTO: ETH) rose 3.9% in the past day to $2,743, but was up only 1.2% in the past seven days. Memecoin Dogecoin (CRYPTO: DOGE) rose 6.3% today to $0.15 and just 0.7% since last week.

The volatility stemmed largely from inflation data that came out on Thursday. Consumer prices were up 2.4% over the past year, but excluding items like energy (which is down big recently), core inflation was up 3.3%.

That sent fear through the market the Federal Reserve wouldn't cut rates as much as hoped in 2024.

Crypto and interest rates: As much as crypto has been touted as an alternative asset that's not correlated to the stock market or traditional currencies, that hasn't been the case for years.

Crypto, particularly Bitcoin and Ethereum, have traded in a correlated manner to growth stocks, which can rise and fall dramatically on economic growth and the market's view on interest rates.

That's why the inflation numbers are so critical to crypto. It was inflation that started the rate-hiking cycle the Fed started in 2022 that ultimately decimated both growth stocks and crypto. And the hope was that we're on the other side of that cycle with rates coming down last month.

A higher-than-expected inflation reading poured some cold water on that thesis, especially because the core inflation rate was much higher than the 2% the Fed wants to maintain.

On Thursday, that dynamic caused the crypto market to drop, and Friday's move was just a reversal of what may have been an overreaction.

Crypto.com Fights Back: After getting a Wells Notice in August, which informs entities the SEC is looking to take action against them, Crypto.com filed a lawsuit against the SEC for exceeding its authority and not following proper rule-making procedures.

The move follows a number of wins in court for crypto exchanges and even blockchain and token developers.

The SEC has not named any tokens as securities in court, but did name a number of tokens in its initial Wells Notice to exchanges, including Solana (CRYPTO: SOL) and ADA (CRYPTO: ADA).

Related Link: Best Cryptocurrency Apps

Volatility and Viability for Crypto: The name of the game this week was volatility, which was driven primarily by similar factors that drive the stock market. But the bigger trend may be working against crypto long term.

Blockchain developments and uses have primarily used stablecoins, not crypto tokens, to make transactions and potentially disrupt the financial system.

A stablecoin tracker from Visa shows $1.6 trillion in transaction volume for stablecoins over just the last 30 days.

If innovation happens on the blockchain with stablecoins as the transaction medium, tokens like Bitcoin, Ethereum, and Dogecoin won't have as much value for investors. As the blockchain matures, that could pressure the most popular tokens in the world, which have become little more than trading assets for investors recently.

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