After an initial dip, Bitcoin (BTC-USD) and Ether (ETH-USD) rebounded shortly after the Federal Reserve raised a key benchmark rate by a quarter-point as widely anticipated to help combat inflation.
Bitcoin (BTC-USD) is changing hands above $41,000, but still remains 8% below where it traded a month prior and is 41% off its all-time high of $69,000 per unit in November. Ether (ETH-USD), the second largest cryptocurrency by market value, is trading at $2,747 per unit, up from $2,615 this morning. That’s still off by 12% from its level one month ago and 43% from its 2021 November peak.
The moves follow a choppy seven-day trading period with investors weighing a 40-year high inflation reading in the U.S. against possible geopolitical outcomes since Russia invaded Ukraine in late February that prompted stringent economic sanctions from NATO allies and sent commodity prices higher.
Investors now have more news to chew, with the Fed indicating that it will raise interest rates up to six more times this year, according to the so-called dot plot that charts expectations of the policymaking members.
‘Expect more pressures on prices’
Over the past 24 hours, the total market capitalization for cryptocurrencies fluctuated by about 2.2% from $1.8 trillion to $1.77 trillion, according to Coinmarket cap.
Initially, short sellers began to take profits Tuesday in the anticipation of a “less hawkish” monetary tightening schedule, according to Ylann Guez, a senior trader with the Tel Aviv-based trading firm, Efficient Frontier.
From here, Guez said crypto investors “can expect more pressures on prices” from rising interest rates.
“Risk assets remain volatile and the result is likely continued uncertainty over the next few months,” Chris Matta, president of crypto asset manager, 3iQ US, added. “Crypto falls into that bucket as we stay in a more risk-off environment.”
So far cryptocurrency investors have had a tough go in 2022. The asset class has plummeted by more than $1.1 trillion from its peak of nearly $3 trillion in total market capitalization.
Investor interest has also waned in the emerging segment for non-fungible tokens (NFTs), with average daily NFT sales tumbling from a three-month high of $160 million to $32 million on Wednesday, according to NFT data aggregator, Nonfungible.
First published over an online mailing list in the wake of the financial crisis, Bitcoin was promoted early on as an alternative payments network separated from the monetary order of governments. More recently, it’s considered a store-of-value asset by some of its more ardent supporters who have dubbed it “digital gold.”
While Bitcoin may have served as shelter for a brief period as Russian citizens fled the collapse of the ruble weeks ago, the asset’s performance has largely been determined by head-spinning volatility and risk-taking since hitting a bull run over the second half of 2020 when the Fed instituted loose monetary policy — unlike a true safe-haven asset.
‘Muted response’ is telling
On the other hand, crypto exchanges saw quiet trading volumes since last Friday until Tuesday night, but modest short liquidations in the derivatives market ($242 million in the past 24 hours per Coinglass) have been far smaller than in past weeks, according to Michael Safai, a managing partner with a U.K. based trading firm, Dexterity Capital.
“The market’s muted response to consecutive rate hikes might indicate that the Federal Reserve’s decision isn’t proving to be the primary driver of crypto right now,” Safai told Yahoo Finance. “Actions in the derivatives market tell us that investors are still being cautious.”
As a JP Morgan Chase strategist recently pointed out, in the coming weeks large institutional funds could send as much as $230 billion into the equities market in the effort to rebalance their portfolios. 3iQ US’s Matta said based on the conversations he has had with institutional investors, that could lead to a spillover effect for the crypto market.
While higher interest rates from the Federal Reserve should lift bond prices, Matta argued that inflation exacerbated by supply chain shortages will continue to push institutional investors to seek higher risk asset to meet their returns.
“Pension plans have a return hurdle they’re targeting. Institutions have had to diversify their portfolios into other asset classes and potentially take more risk and give up liquidity to meet those thresholds by getting into more private credit, equity, and real estate. It’s really hard, in my estimation, to ignore crypto as it adds diversification with higher liquidity,” Matta said, while adding that in three months BTC could range between “$30,000 to $50,000,” or a 25% swing either way from where it is now.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
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