and other cryptocurrencies rose on Thursday as investors flocked back to risk-sensitive assets following the Federal Reserve’s latest monetary policy decision. But analysts do not see this crypto rally as having strong legs, predicting that prices are likely to stagnate at current levels.
The price of Bitcoin has jumped 8% in the past 24 hours to $23,000. The biggest crypto rose in the wake of the Fed’s monetary policy announcement on Wednesday afternoon, which gave Bitcoin its best day in nearly a month. Bitcoin has made steady progress from a low of under $18,000 in June, peaking around $24,000 last week, before falling back as markets entered this turbulent week.
However, “Bitcoin’s short-term outlook remains somewhat precarious,” Yuya Hasegawa, an analyst at crypto exchange Bitbank, wrote in a note.
Digital assets seem almost entirely dependent on macro factors at this point. While factors within the crypto itself – such as the failure of the hedge fund Three Arrows Capital or a regulatory probe into the exchange
(ticker: COIN)—has affected prices, the correlation between digital assets and stocks reigns.
Bitcoin and its ilk should theoretically trade independently of the mainstream financial markets, but has been shown to be heavily tied to stocks – especially technology stocks – and has followed
lower in a sale this year. Bitcoin just hit its worst quarter since 2011, and the total market cap of the crypto has collapsed to $980 billion from nearly $1 trillion nine months ago.
The most dominant macro force at the moment is multi-decade high inflation and the Federal Reserve’s response to it. The Fed announced it would raise interest rates by 75 basis points on Wednesday, or three-quarters of a percentage point.
Markets appeared to take reassurance from the Fed’s commitment to fight inflation and indications that rate hikes may soon slow, boosting both stocks and crypto.
But the recession risk remains. The 75 basis point increase is the fourth rate hike this year and only the second 75 basis point increase since 1994, with the first in June. The concern is that as the Fed continues to raise interest rates and reduce economic demand, it risks plunging the US into a recession. That uncertainty is likely to hang over the digital asset market for some time to come.
“Markets are drifting, including crypto. Until the economy either breaks up or breaks down, not much will happen,” Chris Terry, an executive at lending platform SmartFi, said in a note. “We expect Bitcoin to continue to trade in this tight $20,000 range plus or minus 10-15%. None of this should be a surprise. We could be in this locked-in market for weeks and weeks.”
Additionally, there are signs in the crypto derivatives market that Bitcoin’s recent rally may be slowing. Trading in derivatives such as futures and options based on digital tokens represents the majority of all crypto trading. The volume of derivatives traded on exchanges in June was $2.8 trillion, compared to $1.4 trillion of tokens traded on exchanges, according to crypto data firm CryptoCompare.
“There are several signs that appear to threaten the longevity of this crypto rally, namely a bearish shift in options. The technicals have turned and it will be more difficult for crypto prices to continue to rise on short covers,” wrote Luke Farrell, a trader at crypto market maker GSR, in a note.
Short covering refers to when traders who have taken short positions – betting that an asset will fall – must buy back the underlying asset to close out their position, adding strong buying pressure to the market.
“My expectation is consolidation between …$19,000 to $23,000 for Bitcoin for the remainder of the summer as global macro continues to lead the way,” Farrell said.
— the second largest token — rose 12% to $1,650. Altcoins, or smaller cryptos, were similarly high, with
up 9% and
climbing 7%. Memecoins – originally intended as internet jokes – also got involved
respectively 7% and 6% higher.
Write to Jack Denton at [email protected]