How is Fed tightening affecting bitcoin and other crypto assets?


Bitcoin headed lower Tuesday, a day before the Federal Reserve is expected to raise its benchmark interest rate by 50 basis points and start unwinding its almost $9 trillion balance sheet.

The cryptocurrency
BTCUSD,
+0.49%

was trading around $37,758, down 2.3% over the past 24 hours, according to CoinDesk data. The Dow Jones Industrial Average
DJIA,
+0.20%

closed 0.2% higher Tuesday at 33,341.58.

Bitcoin and growth stocks have been trading roughly in tandem lately, with bitcoin off about 18% in the past 30 days and the tech-heavy Nasdaq Composite
COMP,
+0.22%

down 12% for the same period, according to FactSet. The moves lower come as central bank officials have signaled they plan to tighten monetary policy to combat inflation.  

Though bitcoin posted a greater loss, it remains “surprisingly robust” relative to the equity market, according to on-chain crypto data provider Glassnode. Bitcoin has been trading in the range of $36,000 to $48,000 since the start of this year, still much higher than the low of $28,825 in the summer of 2021. However, the Nasdaq Composite closed at 12,334 on April 29, the lowest level since November 2020.

“We haven’t really seen a true kind of stress test, in my opinion,” Michal Benedykcinski, senior vice president at crypto asset management firm Arca, told MarketWatch in an interview. Benedykcinski highlighted $30,000 as an important support level for bitcoin.

“Without a clear trigger from the FOMC meeting [on Wednesday], I would expect further consolidation [for bitcoin] as options sellers try to earn a yield shorting volatility,” said Abraham Chaibi, co-founder of quantitative crypto trading firm Dexterity Capital. 

“My guess is that 50bps is not going to be the trigger, because we’ve all seen this coming. Instead, any longer-term forecasts from Powell — namely anything that signals that inflation is already pulling back and that the Fed might take an easier stance on future hikes — could have a more significant impact,” Chaibi said. 

Shawn Egger, global head of execution services at crypto broker sFox, also will be tuned in for insights on the pace of Fed hikes. “If there’s any hint that signals slightly dovish actions and or decreasing the amount or frequency of hikes, that could stabilize the global markets accordingly,” Egger wrote to MarketWatch via Telegram.

Fed Chairman Jerome Powell in April signaled a need to move quickly to get its benchmark interest rate up to “to a more neutral level” of interest rates, and maybe higher if needed. A 50-basis-point hike is “on the table” for early May, Powell said. 

‘Flight to safety’?

The crypto market has seen a “flight to safety” within the space, as participants sell smaller coins for bitcoin, the largest cryptocurrency by market capitalization.

Bitcoin is down about 20% since the start of this year, while the small-cap token index is down 46% during the same period, according to research company Arcane Research. Meanwhile, bitcoin dominance, which is measured by its market capitalization to that of the whole crypto market, reached 43.1% on April 30, the highest level since March 29. 

In addition, the sluggish performance of the public market “has only been recently starting to trickle down” to private markets in crypto, according to Arca’s Benedykcinski.

The firm is starting to see some crypto companies and protocols priced at more “reasonable rates” compared with the previous two quarters, Benedykcinski said. 



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