Erik Weijers, 7 months ago

The Fed's upcoming interest rate decision: how will crypto react?

Tonight at 8:00 Central European Time, the U.S. Federal Reserve (FED) will announce the new interest rate. Will it indeed go up by 0.5%, as the market expects? If it's going to be more and/or if Chairman Powell uses stern language, equities and crypto might panick. If the decision is not as bad as expected, prices could rally.

The high priests from Washington have a difficult decision ahead of them. They have recently been slow withtheir monetary interventions. Are they in danger of doing so again? They pumped money into the economy for too long and at low interest rates, causing it to overheat and create high inflation. But by raising interest rates too hard, policymakers are at risk of pushing the global economy into a recession. There are indicators that this recession is on the horizon. So it's tough navigating for monetary policymakers.

Also the markets are walking a tightrope. The war in Ukraine and rising interest rates have caused many people to flee into the dollar and out of relatively risky assets like stocks and crypto. The dollar is now on the verge of a breakout to the upside and the crypto market is hovering not very far above a support line. Very harsh language from the Fed about quantitative tightening could lead to a crash for Bitcoin and hit altcoins even harder. Alternatively, if tonight things go well, then it could well be a case of: sell the rumor, buy the news. Just as it was the case last March.

In any case, if and when it becomes clear - whether tonight or sometime in the next year - that governments will again feel compelled to pursue loose monetary policy (i.e. no interest rate hikes and moneyprinter go brrr), then risky assets will go through the roof again.

In the meantime, it is conceivable that the Fed will choose a middle ground and hurt everyone a little bit. That inflation remains relatively high and stocks and crypto prices flat.

How risky is crypto now?

It's quite nerve wrecking, all the above. On top of that, it annoys many investors that the market is manipulated by the Fed. Aren't we supposed to live in a free market? Nope. But wait... this is what crypto was invented for, right? Exactly.

By investing in crypto, you are voting with your wallet. By doing so, you're signaling that you don't have a high level of trust in the traditional financial system. That makes sense. But if crypto is an alternative system, why do crypto prices fall whenever there is bad news for the legacy system? That's because when investors feel pressure to sell, they sell a little bit of everything. Even if the assets in that basket are fundamentally unrelated. But after the panic is over, the correlation between crypto and traditional markets drops again. This has happened more than once in recent years.

Conclusion

A lot of bad news is already priced in and Bitcoin is relatively cheap right now. We can see this by plotting the price on a long-term logarithmic chart with standard deviations. Mind you: the fact that Bitcoin is oversold now does not mean that the price cannot fall further! But it gives pause for thought if you try to trade on the principle of buy low, sell high.

If your strategy is to dollar-cost-average in crypto and hodl, there is no reason to panic. The number of users continues to grow rapidly and new applications are being built on a large scale and blistering pace.

So let's get some popcorn tonight. In the knowledge that although it can be stormy in the financial markets, that doesn't mean the crypto ship will steer off course.

Featured articles
Four trading strategies for crypto
Bitcoin and Ethereum: what are the differences?
What determines the Bitcoin price?
Related articles
New Bitcoin mining report: 52% zero-emission

Dec 02, 2022

A researcher and former climate activist has established a new methodology to determine the percentage of the Bitcoin mining energy that comes from renewable sources. By including so-called off-grid mining, he estimates Bitcoin's total energy generation at 52% from zero-emission sources.

Trade anytime, anywhere

Boost your trading impact and reaction time in over 80+ cryptocurrencies via instant access to your portfolio with the LiteBit app.

  • 2525 Ventures B.V.
  • 3014 DA Rotterdam
  • The Netherlands
More info
  • About LiteBit
  • Careers
  • Business account
  • Support
  • Sell
  • News
  • Education
Subscribe for updates

Sign up to stay informed via our email updates

Subscribe
Explore popular coins
© 2022 LiteBit - All rights reserved