How does bitcoin fare in a 4% money market landscape?
Douglas Rissing
As many central banks across the globe further embrace their interest-rate hiking marathon, bitcoin (BTC-USD), a gauge for risk appetite and overall sentiment, could keep seeing downward pressure. The same goes for other risk assets like equities.
The U.S. Federal Reserve, in particular, lifted its benchmark lending rate by another 75 basis points for a third straight time on Wednesday, bringing it to 3.00%-3.25%, its highest point in 14 years. But the central bank isn't stopping its tightening cycle there as it struggles to curb inflationary pressures.
Its dot plot, a closely watched summary of expectations for the future outlined by 19 members of the Fed's Federal Open Market Committee, signaled a path for substantially increased interest rates compared with the previous predictions issued in June. Monetary policymakers expect the fed funds rate to top 4% by the end of the year. And in 2023, most officials see the key rate peaking at a level between 4.50% and 5% (the terminal rate).
The Fed doesn't anticipate starting to cut rates until 2024.
The world's largest digital token by market cap (BTC-USD), in turn, wobbled between gains and losses after the Fed's rate decision, but ended up sliding towards the end of the session as market participants got antsy about holding such speculative assets in a rising interest rate environment, especially bitcoin which has already dropped 60% year-to-date.
"Does it mean cryptocurrency investors need to brace for more than a year of a continuous downtrend? Not at all. On the one hand, the chances that we’re nearing the end of this bear market did get substantially lower," said Anto Paroian, CEO and executive director at crypto hedge fund ARK36.
As the Fed tightens monetary policy via rate hikes, consumer's borrowing costs increased simultaneously, so some of them - especially lower income earners - will be forced to liquidate their holdings in risk assets as they fear a recession is coming to fruition. Thus, it's not surprising to see risk asset prices fall in a rate-increasing regime, if history serves as any guide. For a visual of this issue, take a look at how bitcoin (BTC-USD) has fared with surging Treasury yields (US10Y) (US2Y) YTD in the chart below.
During bitcoin's (BTC-USD) huge ascent to its peak of $68.9K in November 2021, interest rates were hovering near all-time lows as outsized fiscal stimulus "came to the rescue" in the face of the Covid-19 pandemic. Stocks, too, spiked as the "easy-money" regime spurred bids across risky assets. But in an aggressive pivot to hawkish monetary policy to tame inflation, bitcoin has since nosedived to $18.9K as of Friday afternoon, about the same level as the bull market top in 2017.
"The risk cycle needed to end for bitcoin to be seen for what it is. Like SPACs, bad IPOs, crypto and NFTs, it was the product of a greed cycle. Sure there are still a lot of hype men and institutions with an interest in propping it up, But the pool of greater fools is shrinking," Mark Dow, a proprietary global macro trader, wrote in a recent Twitter post.
But given bitcoin's (BTC-USD) short-lived history, it's possible that the token can eventually react more positively to rising yields if "web2 institutional investors become firm believers in borderless & decentralized monetary world of web3," Khaleelulla Baig, founder and CEO of KoinBasket, told Seeking Alpha via email. "Bitcoin in the long run will prove to be a good inflation hedge," he added.
SA contributor Clem Chambers shows two charts that signal bitcoin could fall to $15K in 2022.
