Why Bitcoin and Ethereum Were Rising on Wednesday

What happened

The two largest cryptocurrencies by market cap, Bitcoin ( BTC 2.86% ) and Ethereum ( ETH 2.42% ), were also dominant in trading late Wednesday afternoon. As of roughly 4:30 p.m. ET, both were rising by over 4% across the preceding 24 hours. 

So what

There were two big engines driving the prices of Bitcoin and Ethereum higher. The first was a resurgent stock market. Although cryptocurrencies are considered by many to be defensive investments against equity market downturns, in fact, the prices of digital coins frequently correlate tightly with the market’s swings. As bellwether tokens, both Bitcoin and Ethereum can (and frequently do) perform well during bull markets.

Image source: Getty Images.

Driver No. 2 was everybody’s current macroeconomic worry, inflation. Yesterday, we learned that the U.S. Consumer Price Index — an important, closely watched inflation gauge — rose by 8.5% year over year in March.

This was the highest rate in over four decades, and followed a similarly concerning 7.9% jump for February. The March number is rattling investors who were looking for some, any improvement in the situation.

Inflation affects cryptocurrencies because, rightly or wrongly, they are seen as a hedge against it. As alternative currencies to the U.S. dollar, they should therefore do well as the value of the greenback erodes. This thinking was clearly in play Wednesday, as the prices of a great many altcoins besides Ethereum were up, in some instances rather notably.

Now what

Personally, while I’m a holder of Bitcoin and Ethereum, I think only the latter genuinely deserves its current upward push. That’s because Bitcoin still doesn’t have enough practical utility; Ethereum, at least, is the native currency of what continues to be the top smart-contract blockchain on the scene.

Still, I believe both should more or less hold their current values, at least, as long as inflation remains a major worry.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.