How this week’s Fed meeting could affect crypto prices, based on these three charts

If your crypto investments are seeing a little extra volatility this week, you can thank the Federal Reserve.

That’s because the Federal Reserve’s next scheduled meeting starts today, with many experts predicting another rate hike as the Fed continues its efforts to stem stubborn inflation. Expert consensus calls for an increase of anywhere between 75 and 100 basis points to be announced on Wednesday.

If it’s anything like recent Fed meetings, crypto investors could be in for another rollercoaster this week. Historical price charts show how bitcoin’s price fell by at least 10% or more after the last three Fed meetings in March, May and June.

Here’s a closer look:

Although historical data does not clearly indicate how markets will react in the future, especially in the volatile and unpredictable crypto market, experts largely agree that investors should expect fresh volatility this week following the Fed’s expected rate hike announcement. Crypto market sentiment is already looking slightly bearish to start the week, with bitcoin trading below $21,000 and ethereum trading below $1,400. Both are down more than 5% since this time last week.

“In the short term, we’ve seen bitcoin and other cryptocurrencies generally sell off risk assets as the speculative frenzy that defined investments over 2020 and 2021 comes to a halt,” said Stéphane Ouellette, CFA and founder of FRNT Financial, an institutional capital markets and advisory platform focused on digital assets.

This is happening against a background of growing recession fears, which makes this week’s second quarter GDP report and earnings reports all the more important. If Thursday’s second-quarter GDP report reveals that the US is in a technical recession, which is defined as two consecutive quarters of negative economic growth, it could cause “a bunch of mess” in the crypto market, according to crypto expert Wendy O.

“We know that there are rumors that we are going to raise interest rates by 75 basis points. If they only issue interest rates at 75 basis points, we should not see any kind of bad things happening in the market,” says O. “But at the same time, it could be canceled when the second quarter GDP report is released.”

How the Fed meeting could affect the crypto market

Aggressive interest rate hikes are not positive for crypto prices, and experts say the choppiness is likely to continue in the short term.

Risky assets like stocks and crypto have been highly correlated since the start of 2022. Both have moved in unison and have struggled to gain any momentum this year as investors pull away in response to rising interest rates, rising inflation and a potential recession. If the stock market falls due to the interest rate hike this week, the crypto market is likely to too – and vice versa.

The Fed’s rate hike in June was one of many factors that rattled the crypto market in particular, which was already in “crypto winter” mode with rates slashed across the board. Bitcoin and Ethereum fell more than 70% in June since the peak of last year’s bull run.

Investors are keeping a close eye on bitcoin, ethereum and the broader crypto market for “possible retests of the June lows,” according to Edward Moya, a senior market analyst at Oanda.

“The majority of crypto watchers are still waiting for further weakness,” says Moya. “As the global recession picks up, the focus will shift to how soon the Fed will cut interest rates.”

It’s hard to know whether the market has already priced in this week’s potential rate hike, and whether the Fed will opt for another 75 basis point rate hike rather than a bigger move.

“75 basis points seems to be the consensus, so if we see something particularly higher and it kills the stock market, I would expect the crypto market to follow suit,” said Joshua Fernando, crypto expert and CEO of eCarbon, a blockchain technology company focused on carbon emission allowances. “Conversely in the case of a lower rate increase. More important will be the guidance the Fed provides. If the Fed signals strong rate hikes through 2023, expect more pain in the markets.”

What does the Fed meeting mean for crypto investors?

Any significant developments with the Fed, corporate earnings, or the Q2 GDP report this week should not drastically change your long-term crypto investment strategy.

If anything, it’s a reminder to investors that crypto-assets come with additional risk and volatility, especially in times of economic and political uncertainty. Despite the positive momentum of the past week, the crypto market is still nowhere near the highs it reached last year – with bitcoin and ethereum still down over 50% since November.

Given crypto’s history of volatility, prices are just as likely to fall back as they are to continue climbing – and it’s extremely difficult to predict with certainty where they will go next.

With so much financial uncertainty in the air, now is the best time to play it safe by allocating no more than 5% of crypto to your investment portfolio and investing only what you are willing to lose. Always make sure your financial bases are covered – from your retirement accounts to emergency savings – before putting any extra money into a volatile, speculative asset like crypto.