The serious money will be bullish on Fed decision that gave volatility back to crypto markets
Bitcoin and cryptocurrency investors who have been bemoaning the lack of volatility have had their wishes come true it would seem.
The world’s largest digital asset by market capitalisation’s 20-day rolling volatility fell recently below that of the Nasdaq and S&P 500 indexes for the first time since 2020, according to data.
But it seems to have been given a shot in the arm. The reason is fairly predictable too: the Federal Reserve on Wednesday brought to a close its two-day meeting at which it, as expected, raised interest rates by 75 basis points for the fourth consecutive time.
Immediately after Fed Chair Jerome Powell finished his press conference, Bitcoin surged to more than $21,100 before shedding value again and falling back to $20,400 within three hours, and then regaining some ground.
The reason why prices surged comes down to one key line in Powell’s speech in which he hints at a slow-down in the central bank’s rate-hiking agenda.
The statement suggests that policy change could be on its way, saying when determining future hikes, the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The much-anticipated policy “step-down” that could see a rate increase of half a point at the December meeting and then a few smaller hikes in 2023 would present a growth opportunity for risk assets such as Bitcoin – hence the surge in prices on Wednesday as investors piled in to take advantage of the current lower valuations.
However, the cryptocurrency gave up some of its gains as investors realised that the Fed made it clear that it is prepared to push rates as high as needed to combat inflation. The U.S. is an economy still running hot and inflation cannot be tamed unless aggressive action is taken. In other words, they are prepared to destroy part of the economy to get rid of inflation.
To my mind, the fact that Bitcoin has pretty much ended up where it was before the Fed’s announcement highlights that savvy, long-term cryptocurrency investors were not swayed.
Instead, it was Bitcoin ‘newbies’ and/or day traders who were moving the market on hopes of a more dovish central bank.
As I said yesterday in the media before the statement, “Powell will be walking a fine line Wednesday of trying not to get the markets too excited about the potential scenario of less aggressive rate-hiking – hence the likely hawkish tone he will still adopt.”
Overall, I expect that the serious money, including institutional investors and the so-called whales, will be given confidence about the Fed’s hints that it will slow down its rate-hiking pace in the coming months – despite rates likely to remain higher than they were previously.
These investors always look ahead. As such, they are likely to be feeling more bullish than before the Fed’s meeting.
In addition, the battle to control inflation with interest rates underscores, again, that government currencies are now increasingly unreliable to many investors, which provides Bitcoin an opportunity to offer a genuine alternative.