How the changing economy and midterm elections will affect Bitcoin and Ethereum prices

Bitcoin and ethereum have had three consecutive quarters of poor performance this year, and yet many experts are surprised that they are still as strong as they are.

The tokens have been surprisingly – and relatively – resilient and stable over the past week, while other assets have fallen. Most notably, the stock market fell last week and entered a bear market, following the Federal Reserve’s announcement that it would raise interest rates for the fifth time this year.

Bitcoin has struggled to stay above $20,000 for the past month, a key price point for the token. Bitcoin has fluctuated between $18,000 and $20,000 over that time, often in the $19,000 range. Ethereum’s price has been similarly low over the past month, falling from $1,700 to less than $1,300 in mid-September. The price has fallen at the lower end of that spectrum in the past week, struggling to stay above $1,300.

The looming midterm elections and other macroeconomic factors are likely to be key drivers of what happens in the crypto market, experts say. But more recently, there are a couple of potential explanations for crypto’s recent resilience. One could be that long-term owners remain unaffected by current economic conditions, according to Chris Kline, CRO and co-founder of Bitcoin IRA, a digital asset technology platform for individual retirement accounts.

“There aren’t as many newcomers to the market as there were, say, a year ago,” Kline said. “It’s definitely slowed down on that front, but the existing clientele, the long-term investors, they’re here and they’re resilient.”

Another explanation could be that bitcoin has become a major conduit for US dollars in countries struggling with their own currencies, according to Mauricio Di Bartolomeo, co-founder and CSO of Ledn, a global digital asset savings and credit platform.

“Bitcoin is actually outperforming gold, the S&P 500, the great British pound, the euro, the Canadian dollar and a number of other foreign currencies and asset classes,” Di Bartolomeo said. “The world wants dollars, but those who have them do not want to sell them. Bitcoin is a bit of a conduit to get US dollars because it has great liquidity in US dollars.”

Whatever the reason for crypto’s recent resilience and stability, there’s one thing experts agree on: It’s going to be a stacked and interesting end to the year, which will determine whether bitcoin and ethereum prices ultimately sink or swim. Here’s what to look for in the fourth quarter.

What do experts expect for Bitcoin and Ethereum in the fourth quarter of the year?

Both experts and investors are “cautiously optimistic” about crypto in the home through 2022, said Kline, who noted that crypto typically has one impressive quarter each year.

The fact that bitcoin and ethereum are holding steady while other assets plunge are good signs – but the “cautious” part of that optimism is the recognition that there are still many wild cards that could skew prices this year. Let’s get into them.

Federal Reserve rate hikes

The Fed has raised interest rates five times this year. In short, the central bank is trying to cool the economy in an attempt to rein in rising prices. It is a restrictive monetary policy stance that will have “necessary pain points” on the economy, according to Fed Chairman Jerome Powell, who has recently been less certain of a “soft landing” and more convinced that the move will negatively affect employment.

There has been a consistent pattern of crypto reacting negatively to Fed rate hikes. Most recently, the Fed raised interest rates by another 75 basis points in September, and bitcoin and ethereum prices reacted just minutes after the announcement was made.

But the crypto market’s reaction was not as pronounced this time as it has been in the past couple of months. Experts believe this may be because the Fed’s latest move was exactly what the market expected, and that the risk may have already been priced in.

Despite the softer reaction, it’s a bit too early to tell if this is an official decoupling between cryptocurrencies and stock movements as a result of major macroeconomic events, according to Di Bartolomeo.

“If you look at the correlation with bitcoin and the S&P 500, or the NASDAQ, and you look at them on a 30-day framework, or even on a one-year framework, [the correlation is] still relatively strong,” Di Bartolomeo said. He added that it would take time for the data to show a loosening correlation on those timeframes, but if you “zoom in on one-day or one-week correlation, you start to see that drop.”

Two more Fed meetings are scheduled to take place this year, in November and December. These meetings could bring more interest rate hikes, and with them more volatility for bitcoin and ethereum prices.

Powell has consistently said the Fed needs to see significant progress in inflation before easing back on rate hikes. Thus, the Fed’s moves will largely depend on inflation data throughout the rest of the year.

Inflation

Crypto champions have touted the digital assets as a hedge against inflation. But over the past year, it’s become clear that’s not quite the case, at least right now.

“Neither gold nor digital assets, and especially bitcoin, proved to be a hedge [against inflation] because the problem is dollar strength,” according to written statements from 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.

“We all thought bitcoin was going to be an inflation hedge, but it turns out in times of war, the safe haven is still the US dollar, which projects military power more than decentralized computer networks like bitcoin,” Hiesboeck wrote.

Crypto is a volatile and risky asset. So a good appetite for risk is quite important for the market to remain healthy. Inflation readings have been bad news for crypto as it has prompted the Federal Reserve to slow down the economy, which has the effect of turning investor sentiment to the downside.

For example, we saw crypto prices fall after the US Bureau of Labor Statistics released inflation data in August, with bitcoin prices falling 4% and ethereum 7% in 24 hours during that time.

There are still three consumer price indices and four personal consumption expenditure reports due for release this year, and no one would be surprised to see them add more volatility to the crypto market.

Since the crypto market has reacted so directly to recent inflation reports, investors can expect to see further price declines if inflation worsens in the coming months, according to experts. However, how low prices can go is still up for debate. Some experts argue that bitcoin is still poised for a massive departure to the $10,000 to $12,000 range this year, according to Wendy O.

US Dollar Strength

Some experts postulate that crypto has been hurt by a strong US dollar, and conversely believe a weakened dollar would be a positive catalyst for crypto tokens like bitcoin and ethereum. Fortunately for crypto holders, some analysts believe that the strength of the dollar may soon peak.

“A weaker dollar is usually positive for stocks or anything else denominated in US dollars,” Di Bartolomeo said. “A weaker dollar tends to lift stocks, lift commodities and lift things like bitcoin. And then I think a weakening dollar will be a tailwind [for crypto].”

That’s because what pulls dollars away from investment is the strength of the US dollar itself, according to Kline. “If it cools — — actually when it does, because everything cools — you’ll start to see funds diverge.”

Mid-year elections

The last wildcard for crypto this year is the November midterm elections. While it won’t see the same interest and turnout as a presidential election, there are still plenty of seats up for grabs that could shift power on Capitol Hill.

The election results are difficult to predict, and this puts downward pressure and uncertainty on the markets. However, when this uncertainty dissipates, markets tend to pick up and bounce back strongly after the US election is over.

There could be a couple of reasons for this dynamic, but one explanation for that relationship is that incumbents on the re-election trail are making moves during the 11th hour for the economy, passing bills or regulations that help put some power into the market. And shortly after the election, lawmakers begin pushing to keep their promises, according to Di Bartolomeo.

“Whether the old or the new person was elected, they will be very quick to show that they are doing the right thing,” Di Bartolomeo said. “In some ways, the person running for re-election is motivated to use and keep their constituents happy, and the person who was recently elected, especially if it’s a new person, will have an incentive to show that they’re going to get change to to happen. . . And so this usually leads to shocks in economic activity and politics.”

What should crypto investors do to navigate the uncertainty?

Experts believe you should leave the investments alone. Cryptocurrency is already volatile and risky; rapidly changing economic conditions can further increase volatility and crash prices just as quickly as it pulls them up.

With more inflation reports and potential Fed rate hikes on the horizon comes the possibility of an incoming recession. While experts are relatively optimistic about crypto’s prospects during the fourth quarter, they have not ruled out further market declines. As such, you should stay the course on your long-term investments – and that’s true whether you’re talking about crypto or the stock market.

Investment experts recommend that you dedicate a maximum of 5% of your portfolio to crypto, and even if you have not yet reached or exceeded this number, they recommend that you do not make impulsive moves when the market suddenly falls.