How Fed Watchers Interpret the Bitcoin Narrative

For better or worse, cryptocurrency investors have become Federal Reserve watchers. This is a phenomenon that arguably dates back to early 2020, when large institutional investors began moving into crypto. But this summer has been high season for crypto Fed watchers. The Fed raised interest rates by 75 basis points in June, and then by another 75 basis points in July in an attempt to curb inflation. On both occasions, there was much handwringing about the future Bitcoin (BTC -0.28%). Then came the great Jackson Hole, Wyoming, speech by Fed Chairman Jerome Powell on August 26.

Suddenly, the entire Bitcoin narrative seems to be driven by the Fed. Crypto news sites are now filled with stories about the Federal Reserve and monetary policy. This connection has huge implications for the future price of Bitcoin.

Bitcoin and the macroeconomic outlook

Most importantly, it could mean that the price of Bitcoin is unlikely to start moving higher until the Fed completes its monetary policy tightening. This is a dramatic change in outlook. After all, it was only six months ago that some crypto investors were saying that Bitcoin was completely uncorrelated with the broader stock market. That’s what made Bitcoin so attractive to many: By buying Bitcoin, you gained access to an asset that could keep its price higher, regardless of the economic cycle. You didn’t need to know anything about finance to know that Bitcoin was going to the moon.

Image source: Getty Images.

But then came the crash. And then came the monetary policy tightening from the Fed. In both cases, it became clear that Bitcoin was no longer completely uncorrelated with the broader market. It should no longer be crash-proof. And it would no longer be inflation-proof. Fed watchers have debunked the previous narrative that Bitcoin is “digital gold” and a safe haven in times of inflation. The narrative that seems to be emerging is that Bitcoin is going to trade much closer to traditional assets from now on.

Bitcoin and the Institutional Investor

The narrative of Bitcoin over the past decade has largely been driven by retail investors. That’s because big institutional investors never had any real skin in the game. They dismissed Bitcoin as some sort of Ponzi scheme. They spread all kinds of fear, uncertainty and doubt (sometimes called FUD) about Bitcoin. And they refused to add Bitcoin to their portfolios. So when they talked about Bitcoin, no one really listened. If anything, the latest statement from Wall Street bankers was met with derision and derision on social media. What do they really know about crypto?

But this dynamic began to change in 2020, when major Wall Street banks began to embrace crypto. Suddenly, institutional investors were following the crypto market, bringing with them all the tools they used to analyze traditional stock and bond markets. And that included the art of watching the Fed, which has always been their secret weapon for getting a leg up on the average retail investor. From now on, I fully expect much of the Bitcoin narrative to be driven by these large institutional investors. They will release new price targets for Bitcoin, dutifully adjusting those price targets with each Federal Open Market Committee (FOMC) interest rate meeting.

A New Bitcoin Narrative?

To counter this new narrative, retail investors need to bring Bitcoin back. They need to recapture the same free-wheeling narrative around Bitcoin that existed a few years ago before Wall Street got involved. There is a certain crypto-specific charm to one Twitter user with cryptolaser eyes talks up Bitcoin like you’re not going to get from a big institutional investor reading from a boring report. The same people who declared “Bitcoin is digital gold” need to develop a new Bitcoin narrative. Otherwise, crypto investors are stuck being Fed watchers for the foreseeable future.

With the Jackson Hole speech, the Bitcoin investment thesis has changed. Retail investors are going to be bullish on Bitcoin until the Fed gets inflation under control. Even people who never followed monetary policy now seem to be experts on the Fed and its impact on crypto, and they will agree with the idea that Bitcoin cannot bounce back until the US economy recovers. If Bitcoin traders have become Fed watchers, that could make it much more difficult to get another rally off the ground.