The crypto market reacted quickly – and predictably – to the latest Fed rate hike on Wednesday afternoon.
Bitcoin and Ethereum prices immediately fell after the Fed announced that it would raise interest rates by another 75 basis points. The crypto market was already in the midst of a rough week. As of Monday, both tokens have fallen more than 10% over the past week.
Crypto has closely followed macroeconomic events and over the past year, the market has consistently reacted negatively to rate hikes. In a matter of minutes on Wednesday, the price of Bitcoin dropped from around $19,500 to $18,900. Ethereum saw a more modest price decline, falling above $50. Both drops represent a decline of more than 3% since the Fed made its announcement.
After an initial rebound immediately following those drops, Bitcoin fell to around $18,500 and Ethereum fell below $1,300 on Wednesday afternoon. But these drops are still small compared to previous Fed rate hikes. So what gives? According to experts it has to do with market expectations.
“It’s all about expectations, not exactly what happens, but what happens relative to expectations,” said Joel Kruger, market strategist at LMAX Group, a London-headquartered financial technology firm that operates foreign currency and crypto exchanges. “Absent some wild price swings in the immediate aftermath, things have gone as expected.”
Here’s what investors need to know about what’s happening in crypto today.
How Market Expectations Are Driving Crypto Prices Right Now
Experts had expected the Fed to raise rates by 75 basis points. Because those predictions came true, the crypto market did not see extreme volatility in its prices today, at least nothing out of the ordinary. This is in contrast to July, when the Fed announced its first 75 basis point hike (which is significant).
The Fed has been consistent in its message throughout the year. Fed Chairman Jerome Powell shared hawkish sentiments — suggesting that more aggressive action could be taken in the future — toward inflation and further rate hikes in late August. As such, Wednesday’s news was in line with expectations and thus the crypto market did not experience a big shake, say experts.
“It’s a bit of a nothing burger,” said Andy Long, CEO of White Rock Management, a digital asset mining company headquartered in Switzerland. “There was a possibility of 10-20% slightly more hawkishness, but that didn’t happen. Everyone expected 75 [basis points]And so you can see the downward pressure relax a little bit this afternoon.
Long says we will continue to see the short-term impact on crypto prices from Fed rate decisions and economic news, but expectations are already largely priced in before the news hits.
Economic news related to inflation is especially important for the crypto market, as it prompts the Fed to raise rates in the US. Likewise, crypto has been reacting negatively to inflation reports of late. For example, crypto prices fell after the US Bureau of Labor Statistics released August inflation data, with Bitcoin prices dropping 4% and Ethereum 7% in the following 24 hours during that time.
This marks the Fed’s fifth consecutive rate hike. If inflation doesn’t come down, the Fed could become more aggressive and raise rates by a large number in the final two meetings of the year. That could spell an even steeper price drop for the crypto, especially if they don’t live up to market expectations.
How low crypto prices can go this year, though, is still up for debate. Some experts argue that with or without inflation and bad news from the Fed, Bitcoin is poised for a massive fall to the $10,000 region this year.
We don’t think Bitcoin’s price will hit 4-digits again, but a drop to around $13,000 may be out of the question.
What should crypto investors do in light of inflation and Fed rate hikes?
Cryptocurrency is as volatile as investments come, and the current economic climate has supercharged it. With more rate hikes on the horizon and potentially an incoming recession, experts expect more price drops in the crypto market, though they say the impact may be short-lived in line with market expectations.
Accordingly, experts advise staying the course of your long-term investments –– crypto or otherwise –– and avoid selling when prices fall. You could see steep price declines in the coming months, especially if inflation doesn’t improve after the Fed’s fifth rate hike.
“We just have to ride the short-term volatility,” Long said, “and if you believe in the long-term that I do, you can be long-term bullish.”
Investment experts recommend devoting 5% of your portfolio to crypto. In addition, experts warn that you should only invest in what you can afford to lose as crypto prices are notorious for gyrating wildly and suddenly.