How crypto prices may react to the latest Fed decision
by Arthur · March 22, 2023
Bitcoin and ether have an interesting setup heading into the Federal Reserve’s latest policy announcement on Wednesday, and Bernstein is keeping a close eye on what the next rate hike (or lack of one) will do to crypto prices. The Fed is due to wrap up its two-day meeting and reveal its latest policy decision at 2pm ET. Most of the market expects the central bank to raise interest rates by a further 25 basis points. Others expect there to be no hike. Bitcoin is up 22% this month, according to Coin Metrics, and more than 70% for the year. Between the rally in 2023 and a recent break in the correlation to stocks – which is lower than it has been in the last two years – bitcoin is behaving more and more like in the “pre-2020 days of Crypto, where it acted as a” safe haven ‘ and ‘risk-off’ asset,” Bernstein analysts Gautam Chhugani and Manas Agrawal said in a note Wednesday. “We see crypto closer to its non-sovereign, decentralized roots and a safe haven, in the event of fragility with the banking and financial economy, ” they added. “This is a mental model that has started to show some evidence in recent correlation data.” Still, inflation and Fed rate hikes remain the biggest catalysts for bitcoin. Here are three scenarios Chhugani and Agrawal are looking at, and which investors how investors can expect to see prices react 1. Fed raises interest rates by another 25 basis points “Crypto is selling off in this event (small profit booking given strong recent weeks), but not by much because such a move further damages the banking system,” they said . “A St aker banking system that will need an eventual massive intervention by the Fed is bullish for crypto because it reinforces the case for 1. a decentralized “store of value” money that cannot be devalued by a central bank (Both BTC and ETH) and 2. a case for decentralized financial systems that can be transparent, fast and robust in this fast-paced, social digital age of banking and allow users to maintain control of their funds through self-custody,” they added. 2. The Fed halts its interest rate hikes – “perhaps temporarily” The analysts called this scenario a “double-edged sword”, because although it could make investors worried about the seriousness of the banking crisis, they could also interpret this as a temporary one that would provide more stability among banks before the Fed resumes its inflation battle. It “could be an immediate positive impulse for the crypto markets, but definitely the markets will wait to see what else comes out of the banking situation,” Chhugani and Agrawal said. 3. The Fed reduces interest rate increases by 25/50 basis points. The analysts said this scenario is unlikely, noting that while it would be “the right thing to do” to stabilize the banks, it would also change the narrative of the inflation battle. “Crypto markets may rally on the immediate risk-on impulse, and that may vindicate some who have said the Fed reversed course, after busting the banks,” they said. “However, any short-term crypto rally will find it difficult to sustain growth if crypto simply turns into a risk to trade.” “We have a different view here, that risk in low yield markets is not good for crypto as it promotes more gambling and malicious use cases,” they added. – CNBC’s Michael Bloom contributed reporting.
