- The Federal Reserve will conclude its monetary policy meeting on Wednesday.
- The FOMC is expected to deliver a 25 basis point rate hike.
- We assess how the rate hike will affect cryptocurrency prices.
Cryptocurrencies have been under pressure in the past few months. Most digital coin prices like Bitcoin, Ethereum, and Avalanche have all dropped sharply. As a result, the total market capitalization of the industry has dropped to about $1.8 trillion from an all-time high of over $3 trillion.
Federal Reserve interest rate decision
The main reason why cryptocurrency prices have dropped sharply is the Federal Reserve. Indeed, the current wave of decline started in November when the Fed started sounding a bit hawkish.
In its November meeting, the bank decided to start winding down its asset purchases and pointed that it will start hiking in March.
This trend happened as the bank’s officials changed their tune about inflation. For the most part of last year, Jerome Powell was insisting that the current inflation wave in the US was transitory.
Recent data showed that the headline consumer price index (CPI) rose to a four-decade high of 7.9% while core inflation rose to 6.4%.
Therefore, analysts expect that the Fed will start hiking interest rates in its meeting on March 16th. Based on Jerome Powell’s statement, they believe that it will implement a 25 basis point hike.
Still, since the hike has been priced in, cryptocurrency traders will be focusing on the dot plot, which will signal the number of expected rate hikes.
Rate hikes and cryptocurrency prices
Historically, cryptocurrency prices tend to underperform in a period of high-interest rates. For example, as shown below, Bitcoin declined by over 84% in 2018 when the Fed delivered four rate hikes. It then bounced back in 2019 when the bank made two cuts.
Bitcoin and other digital currency prices soared after the Covid-19 pandemic after the Fed slashed interest rates and then embraced an open-ended quantitative easing policy.
Therefore, most analysts believe that cryptocurrency prices will retreat when the Fed embraces a hawkish tone. The same is true for high-risk technology companies that did well in the past few years.
Still, another school of thought says that Bitcoin prices will do well after the first rate hike since investors have already priced in the upcoming hikes.
As such, the situation known as buy the rumor and sell the news could happen after the rate hike happens. This means that we cannot rule out a situation where cryptocurrency prices could rebound after the first rate hike.
