The sudden unexpected rise in the Fed interest rate will likely affect the price volatility of crypto, analysts state.
As the market anticipates the central bank to declare a faster reduction in its pace of bond buying with surging US inflation, crypto investors are closely analyzing this week’s Fed Reserve meeting.
With macroeconomic uncertainties on tow, Bitcoin BTCUSD -0.5% fell more than 30% from the record high of $68,991 in November, now trading at $47,565. Ether ETH USD is also down 0.14%, more than 20% from its highest $4,865.6, recently trading at $3,834.
As the Federal Reserve is planning to speed up tapering of its bond-buying program and indicated faster rate hikes next year, crypto prices are expected to suffer from turbulence in the coming months, said Jesse Cohen, senior analyst at Investing.com.
Cohen wrote that higher interest rates are likely to cause violent sector rotations with investors dumping risky assets like cryptocurrencies for safer resorts like value stocks.
If rate hike expectations become too aggressive, Wall Street might finally get the outback that was long-awaited, sending markets to risk-off mode and punishing the trade that is most profitable, and that is dreadful, said Edward Moya, the senior market analyst at OANDA, a Forex trading platform.
Bitcoin should stay stuck between the $42,000 and $52,000 level leading up to Wednesday’s FOMC decision and upgraded forecasts, added Moya. It is likely that bitcoin’s rise for the past two years has been due to the word going around that the cryptocurrency can be posed as a hedge against inflation, though bitcoin has tried to trade in tandem with the stock market recently, said analysts.
Richard Snow, Forex DailyFX analyst, wrote that generally, crypto markets had witnessed some phenomenal price appreciation as it poses as a hedge against inflation.
However, according to some, the Fed meeting may not necessarily lead to a further downturn of cryptocurrency giants. If in case the Fed surprises the market and postpones the speed of the taper, bitcoin will likely enjoy a rally, Matt Blom, global head of sales and trading at Equinox, a crypto exchange.
According to Blom, it is also plausible that the Fed taper is already priced in, so a rally is most likely anyhow except signaling an early interest rate rise.