The US central bank, or the Federal Reserve, is preparing to raise interest rates to curb inflation and has indicated it may raise rates three times in 2022, perhaps starting in March. Investors have been watching the Fed's next steps, concerned that any policy change will cause crypto prices to plunge.
In a February 16 letter to investors, Morehead agreed with an assessment by Pantera's co-chief investment officer, Joey Krug, that the market had already "priced in about five rate hikes."
Krug said that while “cryptocurrencies definitely took a hit” on news of the Fed’s planned rate hikes, this was being “overblown.” He also predicted that crypto markets will decouple from traditional markets “over the next few weeks.”
He said that when conventional macro markets falter, the crypto market tends to correlate with them for a period of around 70 days before breaking away and starting to trade on its own. The CIO explained:
“Crypto is still a relatively small market, so things like the fed funds rate being 1.25% versus 0% doesn't make a big, big difference for something that grows four to five times year over year. especially if we look at things like DeFi, where it's already trading at pretty cheap multiples."
Read also: Fed Could Raise Rates More than 4 Times in 2022, Says Goldman Sachs
Bitcoin and Ethereum prices have bottomed out
Krug claims that Ethereum (ETH) at 2,200 was “probably the bottom”. This may apply to the broader crypto market, which crashed on January 21, with over $230 billion of the total market capitalization liquidated. Bitcoin fell 7.1% to below $39,000 on the day. It plunged further to around $33,000 a few days later amid fears of a rise in interest rates.
Dan Morehead, CEO of Pantera, said that Bitcoin as an asset class will flourish during periods of rising rates. He discussed scenarios involving different assets and how a rise in rates could affect them. Bond and stock prices will fall, he noted, as will real estate and other types of assets. Morehead said:
“While blockchain is not something cash flow oriented, it is like gold . It can behave very differently than interest rate-oriented products. I think when all is said and done, investors will be given a choice: they have to invest in something, and if rates are rising, blockchain will be relatively more attractive.”
It showed that the price of Bitcoin is currently trading 60% below its 11-year trend, meaning that “the odds are really high that the markets are at an extreme and recover relatively quickly.”
Read also: Pantera Capital CEO: Ethereum and XRP Will Outperform Bitcoin
Morehead predicted what he called the US “bond bubble”, which will burst soon and drive many people into cryptocurrencies.
He also noted that some of the recent drops in digital asset prices may be due to investors selling their holdings to pay taxes, which are due on April 15 in the US.
US inflation rose to 7.5% year-on-year in January, its highest level in 40 years. The Fed says it plans to raise its benchmark interest rate to contain inflation. Rates have been near zero since March 2020.
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