Bitcoin’s relief rally, after the US Federal Reserve’s hawkish tone in the face of the Omicron threat, seems to be slowing down. The largest cryptocurrency market cap fell over 3.5 percent and dropped to $47,000
Bitcoin had risen to $49,000 from $4,000 on Wednesday after the US central bank opened the door for raising interest rates earlier that expected. This was in response to the stimulus that had supported the markets for over a year and a half. The projections of the US central bank show that interest rates could rise to 0.90% by 2022 from their current levels. Analysts refer to this hawkish tilt by the ‘Powell pivot’ because policymakers had previously debated whether to raise rates as inflation was temporary.
In response to higher inflation, the Fed also announced that it would accelerate wrapping up its bond-buying program. Fed Chair Jerome Powell stated that inflation is at an alarming rate during the end of two-day policy meeting.
The Federal Reserve had reduced interest rates to almost zero after the COVID-19 pandemic that struck the country in March 2022. It was also spending $120 trillion each month to purchase treasury bonds as part of its crisis-level bond buying programme.
For months, Fed policymakers believed that inflation was temporary and would subside as supply-chain bottlenecks were removed. But no such luck. US inflation soared to 6.8 per cent in November, the highest since 1982.
Bitcoin had fallen below $50,000 when bears overtook the market in December. However, it had risen more than 2 percent to reach $49,000. It didn’t last long, however, as the coin fell to $47,000 on Friday. The Bank of England increased interest rates from 0.25 percent to near-zero, making it the first advanced economy to do so.
This drop came after Wall Street’s overnight sell-off. The tech-heavy Nasdaq fell more than 2.5 percent. Experts believe that investors are shifting money away from high-risk investments like Bitcoin and tech stocks.
According to CoinDesk, Edward Moya, an Oanda market participant, “The crypto-space is experiencing a lot more repositioning which is leading to some unwelcome selling pressure but the medium-and long-term outlooks remain in place.”
Experts consider Bitcoin a hedge against inflation because the supply of Bitcoin has been limited to 21,000,000. This is in contrast to the US dollar which tends to increase over time. If the US dollar supply increases, then Bitcoin’s value in USD should rise paribus.
Bitcoin can be a risky investment. Easy money policies encourage investors to place risky bets. If central banks tighten their monetary policies and make credit more difficult to obtain, risky bets such as Bitcoin will become less appealing.
According to CoinDesk, tightened monetary policies may result in a slower growth of Bitcoin demand. Many use it to hedge against inflation. However, less QE could mean less inflation. Joe DiPasquale, a crypto hedge fund manager at BitBull, stated that tightening monetary policy might lead to a slower growth of Bitcoin demand.
QE (or qualitative easing) is a tool of monetary policy in which central banks purchase long-term securities in order to increase the economy’s money supply. A lower level of QE will result in a decrease in the economy’s money supply. Federal Bank’s asset buying programme (buying $120 billion worth of Treasury securities) was the biggest QE ever.
DiPasquale stated that the Fed may not be able to reduce inflation, but the effects of QE could lead to the greatest ever inflation. This could lead to a rise in demand for Bitcoin and its price to new all-time highs.