The bitcoin price briefly crashed to under $21,000 per bitcoin, its lowest since late 2020 while the ethereum price plunged under $1,100. Both bitcoin and ethereum have slightly bounced back but remain down 24% and 31% respectively over the last week alone, dragging on other major cryptocurrencies BNB
Now, after worse-than-expected inflation numbers on Friday rattled investors, some economists are predicting the U.S. Federal Reserve could accelerate its planned interest rate hikes—potentially causing more pain for bitcoin and crypto.
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“There is a lot riding on the Federal Reserve’s policy update tomorrow,” Russ Mould, investment director at the broker AJ Bell, wrote in emailed comments. “Investors look as if they increasingly fear the central bank will become more aggressive with the pace of interest rates to try and curb inflation, given May’s cost of living figures were higher than expected.”
The Fed, led by chairman Jerome Powell, will meet on Wednesday following Friday’s inflation data that showed U.S. consumer prices rose at their fastest pace since 1981 in May. Ahead of last week’s data, economists had widely forecast an interest rate hike of 50 basis points, however, many raised their expectations on Monday once they had time to digets the data.
“We believe that risk-management considerations call for aggressive action to reinforce the Fed’s inflation-fighting credibility,” Barclays economists wrote in a report out Monday seen by the Wall Street Journal, pointing to the “risks of prolonged inflation” intensifying. and justifying a larger rate rise.
The mood among the bitcoin and crypto community is bleak after the latest crypto crash, with many expecting further declines as the Fed continues its policy of so-called quantitative tightening.
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“More rate hikes from the Fed will send most risk assets lower,” Anthony Denier, the chief executive of trading platform Webull, said via email.
“The Fed is already planning to raise interest rates a significant amount to battle inflation, but this higher read may force the Fed to hike rates 75 basis points at its next meeting, instead of the expected 50 basis points. Rising interest rates are bad for risk assets.”
The bitcoin and crypto market, including the likes of ethereum, BNB, XRP, solana and cardano, has moved in tandem with stock markets since the Fed announced it would begin tapering its pandemic-era simulus measures late last year, destroying the theory that bitcoin and to a lesser extent ethereum, BNB, XRP, solana and cardano had begun acting as a hedge against inflation.
“Cryptos, contrary to the myths built up over the last few years, are not a hedge against inflation. Instead, we have discovered they are very closely correlated with equities, especially tech stocks. So, when stocks fall, so do cryptos. And with stocks posting big losses, cryptos do too.”