Bitcoin has no experience with rising interest rates, raising risks for those hoping to profit from its precipitous decrease.
The cryptocurrency has plummeted along with other risk assets such as tech stocks since the Fed raised rates last week, setting them on a path that is predicted to reach 3% early next year.
During the previous Fed tightening cycle, from 2016 to 2019, Bitcoin was an uncomfortable youngster on the outskirts of finance, scarcely associated with equities. The last time interest rates reached 3% was in 2008, and it was only a glint in Satoshi Nakamoto’s eye.
Crypto price movements are perplexing even at the best of times, let alone when the market is venturing into unknown territory, raising the risk threshold for traders considering purchasing the drop.
Bitcoin dropped to $29,731 on Tuesday, its lowest level since July 2021, after falling over 12% in the previous week, its largest weekly loss since January.
“This isn’t the first time we’ve hit this level, and the risk-reward ratio for purchasing up bitcoin here has been quite strong in the last year or so,” said Matt Dibb, COO of Stack Funds, a Singapore-based cryptocurrency platform.
“The question this time is whether we will see continuing bad mood in conventional financial markets, which is plausible given the inflation outlook and the possibility of interest rate increases in the next months or years.”
The Fed raised interest rates by 50 basis points last week, the highest increase in 22 years. According to the CME group’s FedWatch programme, another 50 basis point boost is projected in both June and July, with a fourth step possible in September.
“The age of free money is passed. Right now, there is a significant shift in investor interest “said Chris Kline, co-founder and COO of Bitcoin IRA in Los Angeles.
Ether, the world’s second largest cryptocurrency, plummeted to $2,360 on Monday, its lowest level since February, while lesser currencies, known as “altcoins,” have been selling down more fiercely.
“As we’ve seen in previous tumultuous moments in the crypto world, the more speculative altcoins will struggle. Bitcoin is considered dangerous, but certain altcoins are much more vulnerable and will experience even greater sell-offs “Kline said.
“The question is whether people will regard (crypto) as a tool for diversification in weak economies. Is it merely something to have when things are going well?”
WHAT HAPPENS DURING A RETREAT?
Not only are crypto markets in decline. Equity markets have also fallen as investors believe that global central banks are willing to send nations into recession in order to control inflation.
“What’s intriguing is that, while bitcoin hasn’t dropped as much as the Nasdaq or some other asset classes, the link between them has tightened. It’s a stronger association than we’ve observed in the past “Benjamin Dean, director of digital assets at WisdomTree in London, concurred.
Last week, the Nasdaq and S&P 500 fell for the fifth week in a row, while the Dow Jones fell for the sixth. The S&P 500 had its longest losing run since mid-2011, while the Nasdaq had its longest since late 2012.
One factor for the latest crypto sell-off is crypto’s link with equities.
“We’re hearing from investors in some family offices that are liquidating crypto because they’re liquidating other assets, and they need to make it up on their book for this quarter to show that they’re not dying in everything and that they’ve got some money on the side to get back into equities when they bottom out,” Dibb of Stack Funds said.
Some further point out that market sell-offs occur on a regular basis.
“From my perspective, two-way price activity and periodic washouts are beneficial for markets, including crypto,” said Brandon Neal, COO of Euler, a business that allows crypto assets to be lent and borrowed.
He did, however, offer a word of warning.
“We’ve never seen crypto in a recession, and it’s anyone’s guess what will happen.”