This week, Bitcoin and cryptocurrency prices sank after the Fed released the minutes of its December meeting, which revealed a U-turn in its policy that doesn’t bode well for crypto.
As of now, the Bitcoin price is down 9% to $38,040 for the week, tumbling from around $41,500 after the news broke. The world’s biggest crypto shed more than one-third of its value from its November peak.
What’s the fuss?
At the end of last year, the Fed had an about face. Fed Chair Jerome Powell ate his words and admitted inflation is not “transitory.” And the minutes revealed that most Fed officials now warn about higher inflation than previously expected.
Inflation naysayers turned hawks are now gearing up to take swift action.
“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes read.
As recently as last March, the Fed pledged not to raise rates until 2024. Today its officials penciled in three rate hikes this year alone. And the market sees a strong possibility that the first hike is coming at the next Fed meeting in March.
“It’s going to be the biggest hawkish shift in the history of the dot plot,” said Laura Rosner-Warburton of Macropolicy Perspectives.
Why it matters
There’s a heated debate among investors whether cryptos are an alternative to gold, an inflation-fighting store of value, or a risk asset that performs more like an emerging tech stock. This question is especially important today because rising rates hit growth stocks the hardest.
Bitcoin’s proponents argue its limited supply and decentralized nature means that policymakers can’t print it up and depreciate it like fiat currencies. By this logic, cryptos are supposed to weather inflation and retain purchasing power.
Meanwhile, crypto naysayers point to Bitcoin’s price action, which, at least so far, hints this asset class is acting more like a tech stock than an inflation-fighting store of value.
In fact, Bitcoin’s recent slump coincided with the 10-year Treasury yield surging from 1.52% on December 31 to currently 1.71%. And cryptos’ prices are closely correlated to the Nasdaq
If this pattern holds out in the future, Bitcoin and other crypto prices could be in for a shaky year—with all major central banks warming up to raise rates faster than expected to tame the historic inflation surge.
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