Big-Picture Uncertainty Takes a Crypto Toll

Cryptocurrencies have had an incredible run over the past few months, but that's coming to an end as many altcoins are crashing this week.

According to data provided by S&P Global Market Intelligence, Solana (CRYPTO: SOL) had dropped 14.5% over the past week as of 4 p.m. ET, Chainlink (CRYPTO: LINK) was down 15.9%, Sui (CRYPTO: SUI) had fallen 14.9%, and Cardano (CRYPTO: ADA) was down 17.4%.

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A skittish market hits crypto

For cryptos, the policy and enforcement environment in the U.S. is improving, but the market is looking at the economy as a potentially damaging headwind in 2025.

President Donald Trump said tariffs on imports from China, Canada, and Mexico could begin next week and more may be coming. That could make products more expensive for consumers and slow down economic activity, at least temporarily.

Then there are mass layoffs of government workers, which could also impact economic activity short term.

These are the kind of changes that resulted in the Commerce Department reporting a 0.2% reduction in spending in January despite a 0.9% increase in incomes. As has been the case in other surveys, consumers are pulling back their spending, particularly on larger items, as they fear the impact of tariffs and other economic uncertainty.

What this has to do with crypto

Cryptocurrencies are inherently risky assets and they trade correlated with risky growth stocks as well. So, as investors question the future growth of the U.S. economy it makes sense growth stocks and crypto would both drop as investors look for safety.

The market is also seeing an unwinding of some of the crypto speculation that drove valuations over the past few months.

Altcoins are typically more volatile than bigger cryptocurrencies, so they're taking the brunt of the losses. What's interesting is there's momentum on blockchains like Solana and Chainlink in building real utility, like more efficient payment infrastructure and digital asset ownership.

But the value of these innovations may not accrue to the tokens themselves because stablecoins are being used as a medium of exchange. If users aren't paying for goods and services with conventional cryptocurrencies and use stablecoins instead, it could mean less demand for conventional cryptocurrencies.

Crypto is about supply and demand

During the last period of economic uncertainty in 2022, the crypto market dropped dramatically and that could happen again if the economy slows down. What's notable about the last drop was that it didn't even coincide with a recession.

Any recession would be unprecedented for the current state of cryptocurrencies, which really came into the public view after the COVID-19 crash early in 2020. We don't know if crypto values will drop as consumers and investors look for safer assets in a recessionary environment, which could come if tariffs and layoffs negatively impact the economy.

Bottom line: Uncertainty is here for cryptocurrencies and that's not what investors are looking for. And with the tailwinds of 2024, like ETF listings and the election behind us, buyers look like they're drying up.

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Travis Hoium has positions in Solana. The Motley Fool has positions in and recommends Cardano, Chainlink, Solana, and Sui. The Motley Fool has a disclosure policy.