Today, cryptocurrency markets are continuing their herky-jerky ascension from the doldrums. This comes on the heels of reports that Federal Reserve Chair Jerome Powell said is of a mind to raise U.S. interest rates in March to fight inflation.
Mikkel Morch, Executive Director at cryptocurrency hedge fund ARK36 who has been studying the markets in relation to the Federal Reserve announcement offered a few thoughts regarding the current landscape:
“Digital assets, including Bitcoin, tend to become more correlated with stocks during stress periods when most of the investment markets go risk-off. Unsurprisingly, then, the crypto markets moved almost in tandem with the stock market following Fed's Chair Jerome Powell's press conference in the aftermath of this month’s FOMC meeting”
Morch went on to note that the markets’ first reaction was positive and optimistic as the market participants had clearly expected a much more hawkish stance from the Fed. However, while Powell did indeed sound dovish at the beginning, it seems that he failed to offer enough reassurance to really turn the tide of the bearish sentiment that has gripped the markets since last week.
This, Morch says, is why the initial enthusiasm started waning soon after and Bitcoin - along with other major digital assets - struggled to defend its gains following an initial spike. Expanding upon this thought, he had this to offer:
“Importantly, the Fed’s chair neither confirmed nor discounted the possibility of raising rates by 50 basis points instead of 25 meaning that we could see .50 hikes this year. Instead, Powell mentioned that the Fed will be “humble and nimble” in responding to the macroeconomic risks and inflation data.
In other words, while the situation doesn’t warrant upsetting the stock market too much yet, Powell signaled that the Fed is prepared to let stocks go deeper into the correction territory to follow through on its mandate of keeping the prices stable.”
Rance Masheck, CEO and Founder of iVest+ (iVestPlus.com), a company that develops cutting edge trading software platforms and systems, including their direct-to-retail product, Market Gear, had this to add about the recent cryptocurrency decline:
“The last two weeks have seen a sharp drop in Bitcoin and most of the cryptocurrencies. There are several factors that played into this decline, and our 2022 Market Predictions issued at the start of January noted a more volatile market in 2022. We also predicted changes to cryptocurrency, not only in terms of regulation, but in it becoming more mainstream.”
Masheck believes that as more of the general public gets into cryptocurrency, it is natural to expect a “Bagholder Moment” where near players are caught holding coins at high prices while the bigger existing players use the liquidity opportunity to get out. He does assert, however, that there are several other key factors that are likely contributed to the decline.
“First and foremost, the Fed is likely to raise interest rates a few times in 2022. When rates are at near-zero levels, it forces money into more aggressive markets and assets to seek a return. However, as rates move up, more money can return to safer havens and still keep ahead of inflation. This is likely a big piece of the current price action. The top in Bitcoin, for example, was actually back in November when the Fed began to signal that higher rates were on the way to counter inflation.”
Masheck believes that the Biden Administration is preparing to comment on the state of cryptocurrencies. This, he says, will likely lead to some deeper analysis that is the prelude to regulation that has long been predicted.
“Regulation of the crypto market may not be a bad thing in the long term at all. It may garnish trust and make the market more robust. Several key tech giants are readying multi-billion dollar investments in crypto, and those plans aren’t going to change over regulatory concerns. However, until the details of the regulation are known, it is safe to say that bigger crypto positions are probably being converted back to regular currencies.”
Finally, Masheck says, the markets are all facing uncertainty related to Russian action along the Ukrainian border.
“The unknown here could affect energy markets or much worse if the situation explodes beyond the region. The US could also cut off Russia from global banking, which could impact cryptocurrencies as well, much of which are owned internationally. While no one knows exactly how this will play out, it is certainly a factor in the recent sell-off.”
He offers this concluding thought:
“We remain excited though about the future of digital currencies and believe that this decline and the factors leading to it are nothing more than typical global uncertainties that impact all markets from time to time. We may not have found the bottom yet, but as these various unknowns are resolved, we should see crypto and other markets stabilize and then resume their more normal trading patterns.”
