Why Bitcoin and Ethereum prices will continue to suffer from more Fed rate hikes, according to experts
It’s been a tough week for bitcoin and ethereum prices, and Federal Reserve Chairman Jerome Powell has a lot to do with it.
Bitcoin and ethereum both saw big drops on Saturday, with bitcoin falling below $20,000 and ethereum falling below $1,500 for the first time in over a month. The falls followed a speech by Federal Reserve Chairman Jerome Powell last week in which he poured cold water on hopes that the Fed could pull back on more rate hikes this year as it continues its battle to curb inflation.
Although bitcoin had seen some improvement and regained above $20,000 on Sunday, it slipped back below the main benchmark on Tuesday. Ethereum has seen similar movement. Bitcoin climbed back up a bit to hover above $20,000 on Wednesday morning, with Ethereum climbing back to around $1,600 after falling below $1,500 on Tuesday.
Powell’s speech last week came amid a gathering of central bankers from around the world. Investors were listening closely for clues that the Fed could ease its restrictive policy at the central bank’s next meeting in September.
Those hopes were quickly redirected when Powell opened his mouth, and the market reacted accordingly. Stocks saw an immediate decline and continue to plunge on Tuesday, after two days of back-to-back losses after Powell confirmed that the central bank must continue to fight high inflation by driving up interest rates further. The crypto market has followed suit, which has increasingly been the case in recent months as the prices of bitcoin and ethereum have increasingly followed the stock market.
Experts say crypto prices will continue to feel the effects – increasing volatility and falling in price – as the Fed raises interest rates further in the coming months. Here’s what crypto investors should know to stay smart through the volatility and uncertainty.
How do Fed rate hikes affect crypto prices?
The Fed’s main goal is to slow inflation by slowing the economy. While the result should slow rising prices, the slower economy is also eating away at corporate profits and investor sentiment.
And the negative feeling doesn’t stop at Wall Street’s doors. It bleeds into the crypto market as risk aversion grows to match a deteriorating economy. It’s not a direct relationship, but we’ve seen this pattern play out over the past couple of months.
Bitcoin’s price fell as low as $17,500 after the Fed’s June meeting when the central bank raised federal funds rates by a significant 0.75 percentage points.
“You can see the impact of rising interest rates on the NASDAQ, and cryptocurrencies have been shown to be closely correlated with high-growth tech stocks,” according to emailed reports from market analysts at Bitfinex, a cryptocurrency exchange based in Hong Kong.
“So, the cryptocurrency market has clearly been hit directly by recent Fed rate hikes and, like other so-called risk assets, is highly sensitive to Fed pronouncements.”
Although the prices of bitcoin and ethereum – along with the stock market – have seen small gains in recent weeks, crypto expert and educator Wendy O says interest rate hikes and broader economic uncertainty could still contribute to an extended bear market. “In past bear cycles, both cryptos have corrected 85%,” O told us recently. “I expect bitcoin to reach $10,000 and ethereum to $750.”
How should crypto investors deal with multiple interest rate hikes and falling prices?
Experts say further rate hikes will further constrain the US economy, which has experienced two consecutive quarters of negative GDP this year and by some points is either already in or on the brink of a recession. As such, if the Fed continues to tighten monetary policy during its September meeting, we can expect to see markets react negatively, including crypto. But that doesn’t mean you should drastically change your long-term crypto investment strategy.
As with traditional investments, you want to avoid buying high and selling low, which is the impulse to do when the market starts to panic. Especially if the US enters a long-term recession, your best bet is to stay the course on your long-term investments.
“The trend of risky assets being hit by interest rate hikes shows no signs of abating,” Bitfinex Market Analysts said. “Therefore, we can expect bitcoin and ethereum to be negatively impacted by Fed monetary policy. That said, the Fed has become adept at telegraphing its intentions, and arguably much of the anticipated Fed policy is already priced in.”
As always, nothing is guaranteed when it comes to crypto – a market that notoriously plummets to a trough as quickly as it reaches a peak, sometimes within days. Bitcoin, ethereum and other altcoins are risky assets, which become more volatile the more economic uncertainty there is. Bitcoin’s wobbly prices over the past couple of days are emblematic of this volatility.
“We all thought that bitcoin was going to be an inflation hedge, but it turns out that in times of war the safe haven is still the US dollar, which projects military power more than decentralized computer networks like bitcoin,” said Dr. Martin Hiesboeck, head of blockchain and crypto research at Uphold, a global multi-asset trading platform that allows users to trade crypto, fiat currencies and precious metals.
Investment experts recommend dedicating no more than 5% of your investments to crypto – and that’s with a high risk tolerance when times are good. In these tumultuous times, it’s best to play it safe.
