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Fed Reserve Chairman Warns That Cryptocurrency Market Is “Frothy” Right Now

Posted Friday, April 30, 2021 by
Timothy St. John • 2 min read

Jerome Powell, the US Federal Reserve Chairman, capital markets are a “bit frothy” at the moment. This was Powell’s response to a question about financial stability and risk in the cryptocurrency market at a press conference on Wednesday.

When an investment market is frothy, it means that people are investing in a currency or asset to an extent that goes beyond its current value. In response, the price of the asset begins to overinflate, and this is followed by a price decline. A frothy market is usually defined as the condition of the market just before a bubble occurs.

Financial leaders like Powell are concerned about the market and how it is being affected by increased interest in Dogecoin and GameStop stock in recent months. The value of both of these currencies has skyrocketed recently outside of a conventional investment understanding of how the value of assets changes. Dramatic increases in their value have been attributed to their popularity among fringe investors which have worked to artificially inflate their value.

An Incoming Bubble?

Investors are concerned about how this will affect the overall market, including other stocks and cryptocurrencies. DOGE/USD went from a cryptocurrency created as a joke to an asset worth a total market value of $40 billion. This currency continues to see remarkable increases, such as doubling within 24 hours and increasing by 400% in seven days.

Investors are concerned that these kind of meteoric rises are not sustainable and are likely to result in a market bubble that could burst at any time. An analyst for UK investment app Freetrade, David Kimberley, expressed concern about Dogecoin, calling its rise “a classic example of greater fool theory at play”.

Factors Behind the Frothy Market

In Wednesday’s press conference, Powell remarked that the frothy market is due to how the economy is reopening and the vaccination rollout, primarily. Cryptocurrency prices have also inflated dramatically around the world because central banks are pumping new money into a variety of markets. This has been an effort to help fight the economic depression caused by the coronavirus.

He noted that the markets are moving very quickly now, as the vaccination process is speeding up and economies are opening much faster than before. The chairman was very positive about how quickly the US economy is recovering.

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