Historically, Bitcoin has shown an inverse relationship with the US Federal Reserve (Fed) base rate. Analysts predict that the upcoming meeting of the regulator on March 20 could become a serious obstacle to the growth of the crypto market.
In a commentary to ForkLog, experts explained the macroeconomic pattern and shared their forecasts.
Bet and Bitcoin
US monetary policy has long impacted the digital asset industry. When it tightened in 2018, Bitcoin went into correction. A similar price relationship was observed during the 2022-2023 bear market.
Correlation between the Fed interest rate and Bitcoin. Data: TradingView.
We can conclude that a low key rate stimulates investments in riskier assets, such as the first cryptocurrency. Consequently, the economic recession and subsequent rate increases, on the contrary, encourage market participants to move to more traditional safe instruments.
“The Bitcoin exchange rate has a close correlation with the amount of liquidity and the cost of borrowing, since it is essentially a risky asset. The more liquidity and cheaper money, the faster risky assets grow,” explained trader Vladimir Cohen.
However, macro data publications in recent months have not greatly affected digital gold prices. The February slowdown in inflation, which was weaker than expected, led to the postponement of expectations for the Fed to cut its key rate from May to June. Then Bitcoin temporarily corrected by 3%, but quickly restored its previous values.
According to Cohen, the first cryptocurrency demonstrated an “abnormal situation” last year when, despite the tight monetary policies of most central banks, it maintained positive dynamics.
This is due to large purchases by institutional investors ahead of the launch of spot Bitcoin ETFs in the United States. That is, the cryptocurrency grew on expectations of high demand, the expert added.
“The Fed is expected to start cutting rates, so investors are gradually moving from conservative instruments to risk. Moreover, this coincided with the launch of ETFs and the approaching halving. In other words, now there is a combination of factors that have influenced the cryptocurrency market and will continue to influence it in the future,” added trader Artem Zvezdin.
Further Fed policy
Most market participants agree that following the results of the March meeting, the Fed will leave the key rate unchanged, emphasized Anton Toroptsev, regional director of the CommEX exchange in the Russian Federation and the CIS.
“The American economy is not showing signs of recession: the labor market is showing a stable recovery, and inflation is gradually decreasing. But while the growth rate of consumer prices has not reached the target 2%, the Fed prefers not to rush to ease monetary policy,” he explained.
At the end of February, the consumer price index in the United States increased from 3.1% to 3.2%. The values planned by the regulator are still far away, so Toroptsev believes that a reduction in the key rate will most likely occur in June or, less likely, in May.
“A reduction in the key rate will have a positive effect on Bitcoin, because now its rate is supported by demand for spot Bitcoin ETFs. As a risky asset, they will only benefit from an easing of credit policy, since after a rate cut, bond yields will decrease and capital will begin to flow into riskier and more profitable stocks,” the top manager said.
According to the Fed itself, three rate cuts are planned in 2024, but American market participants are hoping for four, the speaker clarified.
Perhaps they will be divided over time so that the regulator can assess the effect on the economy. Therefore, one of the reductions should occur in the first half of the year.
“Since few people hope for a reduction in the key rate following the March meeting, this event will not have a strong effect on the Bitcoin rate. But there may be a period of increased volatility during the meeting [ФРС] and decision announcements,” added the CommEX regional director.
Given the current situation, there is a possibility that the rate will not be lowered in June, and the Fed will continue to tighten monetary policy, Cohen said. In this case, Bitcoin’s growth will stop and there will be a risk of a serious correction in the crypto market.
Medium term prospects
Zvezdin is confident that the rate reduction will strengthen the positive dynamics of cryptocurrencies. Moreover, the rise in the current bull cycle will be “faster and stronger” with Bitcoin peaking at $200,000.
According to Cohen, a rate cut is not expected in March and May, but this is already included in the price of the first cryptocurrency:
“Market consensus implies the first policy easing in June. The industry will closely review and respond to comments from Fed members after the meeting.”
Toroptsev emphasized that Bitcoin and the cryptocurrency market do not exist in a vacuum and are related to the state of the global economy. Noticeable shocks also affect the rate of digital gold, so the correlation with the stock market will remain.
However, Toroptsev clarified, due to the similarity of Bitcoin and gold, in the event of economic downturns, the former will be able to recover faster and move on to growth as an analogue of a protective asset.
“Now everyone is waiting for the April halving, after which a period of volatility may begin when the range of fluctuations in the Bitcoin rate will expand significantly. Quotes may drop by 20%, and then, judging by historical data, a stage of more stable growth will begin,” suggested the regional director of CommEX.
Toroptsev also allowed for a different scenario without a significant drawdown due to spot Bitcoin ETFs. Demand from funds will support the price of the cryptocurrency and prevent it from fluctuating greatly.
The SEC’s decision on applications to launch ETH-ETF will also have an indirect impact on Bitcoin. If approved, this will increase the already high optimism in the crypto market and provoke a new wave of growth, the expert concluded.
Let us remind you that Coinbase analysts pointed out risks for the further growth of Bitcoin. Among them, they highlighted the Fed policy and halving.
JPMorgan also predicted a correction of the first cryptocurrency to $42,000 after the reward for miners was reduced.
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2024-03-12 14:54:18
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