Here’s the biggest risk facing Cardano, Solana, Polygon, XRP, Cosmos

Investors are getting fearful as risks to the financial market rise. The fear and greed index has retreated from the year-to-date high of over 80 to the fear zone of 34. As a result, American stocks have pulled back from their highest levels this year, with the Nasdaq 100, S&P 500, and Dow Jones have retreated by more than 7% from the YTD high.

Cryptocurrencies are facing risks

Bitcoin and other cryptocurrencies have retreated sharply from their highest point this year. BTC has slumped by more than 17% from the highest point this year. Similarly, Cosmos ATOM has slipped by over 50% while Bitcoin Cash and  Polygon MATIC have slumped by more than 30%.

Cryptocurrencies have slumped because of several risks. First, cryptocurrencies have slumped because of the rising regulatory risks in the market. The Securities and Exchange Commission (SEC) has resisted the launch of a Bitcoin ETF. It is now considering an ETF by companies like Blackrock, WisdomTree, Invesco, and Fidelity.

The SEC has also launched several lawsuits, with the most recent ones being against Binance and Coinbase. Other regulators like ASIC and FCA have also announced some regulatory scrutiny.

Cryptocurrencies are also facing low demand after going through a major crypto winter since 2021. As a result, the volume traded in all cryptocurrency exchanges has dropped to the lowest level in years.

The Fed is the biggest risk

The Federal Reserve is the biggest risk facing both cryptocurrencies and stocks. Last week, the bank decided to leave interest rates unchanged between 5.25% and 5.50%. The dot plot pointed to another 0.25% rate hike later this year. If this happens, the Fed will push rates to between 5.50% and 5.75%.

In addition, the Fed has committed to continuing its quantitative tightening (QT) policy. This QT has seen it reduce the balance sheet by more than $ 1 trillion in the past few months. 

These rate hikes have major implications to stocks and cryptocurrencies like Jasmy, Avalanche, Polygon, Solana, Bitcoin Cash, and Cosmos ATOM. For one, they make other safe assets like money market funds (MMF) more attractive to investors. These yields have jumped to almost 6% while 2-year treasuries are yielding over 5%.

Higher interest rates, coupled with soaring inflation, raise the cost of living. Recent data shows that mortgage rates are approaching 8% while defaults have been rising. Therefore, many people don’t have the discretionary funds they had when interest rates were at zero. Rate hikes could also lead to a recession, as I wrote here. History shows that Bitcoin and other altcoins underperform in a period of high rates.