Why Bitcoin, Ethereum, and Dogecoin Crashed and Bounced Back Today

The crypto market went into a tailspin over the 24 hours before a sharp recovery midday Friday as investors begin to wonder how healthy the economy is and if the high valuations for risky assets are justified. Despite being sold as a hedge against inflation and the economy, crypto traded like a growth stock, and that's become a headwind in 2025.

As of 2:00 p.m. ET, Bitcoin (CRYPTO: BTC) is flat over the previous 24 hours, but it earlier fell over 6% and broke below $80,000; Ethereum (CRYPTO: ETH) is off 4% but was down as much as 9.7% at midday; and Dogecoin (CRYPTO: DOGE) has fallen as much as 12.5% before recovering to a 3.9% loss. This is ahead of the weekend, when liquidity usually goes down, which could result in more trading volatility.

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Economic reality collides with speculation

The run in crypto over the past four months has been driven by speculation that the new presidential administration would lead to more favorable policies. That has happened, but it hasn't translated to higher crypto valuations because buyers speculating on the move have already come into the market.

Most cryptocurrencies, including Bitcoin, are near or below where they were when the U.S. election took place, so the buying pressure has passed. What investors are focused on today is a report from the Commerce Department, which showed a 2.6% increase in prices from a year ago but a decline in consumer spending of 0.2% despite a 0.9% increase in incomes.

Consumers are spending less on vehicles and other large items while the cost of food and housing eats into budgets. Since consumers drive the economy, this is a clear concern for investors.

Why crypto is hit by economic uncertainty

You may think the crypto market is insulated from the overall economy, but that's not the case. Cryptocurrencies trade much like growth stocks, which have had a great run over the last few months.

But tariffs on imports from Canada, Mexico, and China may go into effect next week, and consumers are already pulling back their spending. That could lead to worsening economic conditions and less money for risky assets like cryptocurrencies.

Oddly enough, the economic decline may hit crypto before it hits the companies that will see lower revenue.

Uncertainty won't help crypto

Coming into 2025, the idea was that an improved policy environment would be good for cryptocurrencies. And while the policy environment has improved, the crypto market hasn't responded positively. That's in large part because there hasn't been enough time for innovation to flourish on the blockchain.

Speculation drives prices higher, but it could take years for truly innovative companies to take hold. We can see some of that development happening, but innovation is taking place with stablecoins, not traditional cryptocurrencies, as the medium of exchange. That may mean less money flows into Bitcoin and meme coins like Dogecoin.

To make matters worse, Ethereum seems to have fallen out of favor as faster, cheaper blockchains gain adoption. Add it all up and uncertainty is the norm, and that may push cryptocurrencies lower for the foreseeable future.

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Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.