This week, investors might see some volatility in cryptocurrencies due to the Federal Reserve's decision to raise interest rates for the fourth time this year. The central bank's actions aim to curb inflation and ensure that the U.S. economy doesn't overheat.
If the Fed's actions lead to another dip in the prices of cryptocurrencies, investors might see the second round of volatility. Historical price charts show how the price of Bitcoin dropped by around 10% following the last three meetings of the central bank.
During the week of March 13, the price of Bitcoin briefly dropped. However, it recovered and gained ground following the Fed's decision to raise interest rates for the first time since 2018.
Bitcoin's price initially spiked following the Fed's meeting on May 3 and 4. However, it then started to decline on May 6. In response to the growing concerns about the economy, the central bank unveiled a plan to reduce its balance sheet by around $9 trillion.
After the Fed's two-day meeting on June 14 and 15, Bitcoin's price dropped to around $17,500. The central bank then raised interest rates by a total of 0.75%.
Investors to expect volatility
Although historical data doesn't provide a clear picture of how the markets will react in the future, experts believe investors should expect volatility in cryptocurrencies due to the Fed's rate increase.
After the Fed's rate increase, the prices of Bitcoin and other digital assets rose significantly despite bearish sentiment. On Thursday afternoon, Bitcoin was trading at around $23,000, and Ethereum was at around $1,700.
According to Edward Moya, a market analyst at Oanda, the Fed's decision to raise interest rates provided a positive outlook on the economy and indicated that the end of the tightening cycle was in sight.
This week's earnings reports and the release of the second-quarter gross domestic product report were highly anticipated due to the growing concerns about the economy. On Thursday, the government reported that the U.S. economy contracted in the second quarter. It marked the second quarter of negative economic growth, considered a technical recession.
Despite the positive outlook on the economy, experts believe that the rate hike by the Fed will not be beneficial for the prices of cryptocurrencies.
The correlation between the prices of stocks and cryptocurrencies has been one of the most prominent factors in the markets since the start of the year. Due to the rising interest rates and the potential for a recession, investors have been pulling money out of both the stock and crypto markets. If the stock market goes down following the rate hike, the cryptocurrency market will also follow suit.
As the market continues to react to the rising interest rates and the potential for a recession, investors are still keeping a close eye on the prices of cryptocurrencies. According to Edward Moya, the potential for a bounce back from the June lows remains intact.
As the global economy worsens, investors will start looking for signs of when the central bank will start to reduce its interest rate.
According to Joshua Fernando, CEO of eCarbon, it's hard to predict precisely how the market will react to the Fed's rate increase this week. If the Fed's rate hike in 2023 is perceived to be significantly higher than expected, it will negatively affect the prices of cryptocurrencies.
"If the Fed signals strong rate hikes through 2023, expect more pain in the markets," Fernando said.