The price of Bitcoin appears to have been significantly impacted by the release of minutes from the Fed’s December meeting. Should you prepare for a new Bitcoin crash?
The cryptocurrency market has experienced the worst start to the year in its history, having lost hundreds of billions of dollars of capitalization in just a few days. Back on December 31, the price of Bitcoin was $46,500, but now the bulls are using all their strength to keep the price above $40,000.
The latest sell-off in the cryptocurrency market is associated with a radical change in the course of the US Federal Reserve System (FRS), which is in a hurry to move to tighten monetary policy to prevent an even greater rise in inflationary pressures in the country.
Recall that in November, the Fed announced the curtailment of the quantitative easing program, under which it poured $120 billion into the economy every month. At its December meeting, the Federal Reserve decided to accelerate this process and completely stop the "printing press" in March, and then begin to raise the interest rate.
Traders found even more hawkish signals from the Fed in the minutes of the last meeting of the American regulator, which were published on January 5. It follows from them that voting FOMC members are ready to act much more decisively than the market expected and include three rate hikes in their forecasts in 2022.
For now, interest rate futures traders estimate the likelihood that the Fed will raise its short-term target rate at its March meeting at 71%.
A month ago, shortly after the emergence of the omicron strain, this probability was estimated at 32%. Moreover, the Federal Reserve is considering the possibility as early as next year to begin reducing the balance sheet, that is, withdrawing money from the financial system. As of January 5, the balance of the American Central Bank reached $9 trillion, having doubled since the beginning of the pandemic.
The hypothesis that the unprecedentedly stimulating policy of the FRS contributes to the growth of the cryptocurrency market has long been supported by the correlation between the volume of cash injections into the economy from the world central banks and the growth of risky assets. Now the reverse process is starting to withdraw liquidity from the market. For this reason, tightening monetary policy in the United States will affect not only the value of money but also the risk premium.
Recall that at the moment of general euphoria, riskier investments show the best profitability, but they pay for it with no less serious losses at the time of general panic. Market participants believe that an increase in the key interest rate in the United States will make investors panic, and therefore transfer capital into defensive assets such as bonds and gold. Against this background, Bitcoin may well be among the main outsiders and runs the risk of sinking to $30,000.
On Thursday, Mike Novogratz, the CEO of financial services firm Galaxy Digital, told CNBC the selloff could push bitcoin down another 8% from current prices to as low as $38,000—a level unseen since early August.
“I'm not nervous in the medium term but we're going to have a lot of volatility in the next few weeks,” the crypto billionaire and staunch bitcoin bull told CNBC, before pointing to booming institutional adoption as a bullish indicator for the nascent space.
Despite bitcoin's bouts of intense volatility, Mike McGlone, a senior commodity strategist at Bloomberg’s research arm, predicted that the cryptocurrency could top $100,000 in 2022. The senior Bloomberg analyst believes that when markets face high inflation, investors will turn to Bitcoin and gold investment as a safe haven.
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