Bitcoin and ethereum both saw big drops Saturday, with bitcoin falling below $20,000 and ethereum dropping below $1,500 for the first time in over a month. The drops followed a speech by Federal Reserve Chairman Jerome Powell last week in which he poured cold water on hopes the Fed might pull back on more rate increases this year as it continues its fight to slow inflation.
Though bitcoin saw some improvement and got back over $20,000 on Sunday, it dipped back down below that key benchmark Tuesday, and has been teetering back and forth since then. Bitcoin climbed back up a bit and hovered above $20,000 Wednesday morning but slid down again Thursday morning. Ethereum has similarly seesawed during that time, back below $1,600 on Thursday morning. Ethereum is currently down 8% over the last week
Powell’s speech last week came amid a gathering of central bankers from around the world. Investors were listening closely for clues the Fed might ease its restrictive policy stance at the central bank’s next meeting in September.
Those hopes were quickly routed when Powell opened his mouth, and the market responded accordingly. Stocks saw an immediate drop and continue to plummet Tuesday, following two days of back-to-back losses after Powell reaffirmed that the central bank must continue fighting high inflation by further driving up interest rates. The crypto market has followed suit, as has increasingly been the case in recent months as the prices of bitcoin and ethereum have increasingly tracked the stock market.
Experts say crypto prices will continue to feel the effects – increasing in volatility and dropping in price – as the Fed further hikes interest rates in the coming months. Here’s what crypto investors should know to stay smart through the volatility and uncertainty.
How Do Fed Rate Hikes Affect Crypto Prices?
The Fed is essentially aiming to slow inflation by slowing down the economy. While the result should slow down rising prices, the slower economy also eats into corporate profits and investor sentiment.
And that negative sentiment doesn’t stop at Wall Street’s doors. It bleeds into the crypto market as risk aversion grows to match a worsening economy. It’s not a direct relationship, but we’ve seen this pattern play out for the last couple of months.
Bitcoin’s price dipped as low as $17,500 following the Fed’s June meeting when the central bank hiked the federal funds rates by a significant 0.75 percentage points.
“You can see the impact of rising interest rates on the NASDAQ, and cryptocurrencies have proven to be closely correlated with high growth tech stocks,” according to emailed statements from market analysts at Bitfinex, a cryptocurrency exchange based in the British Virgin Islands.
“So, the cryptocurrency market has manifestly been hit directly by recent rate hikes from the Fed, and, like other so-called risk assets, is highly sensitive to utterances from the Fed.”
Though the prices of bitcoin and ethereum – along with the stock market – have seen small rallies in recent weeks, crypto expert and educator Wendy O says the rate hikes and broader economic uncertainty could still contribute to an extended bear market. “In previous bear cycles, both cryptos have corrected 85%,” O told us recently. “I anticipate bitcoin to hit $10,000 and ethereum to hit $750.”
How Should Crypto Investors Deal With More Rate Increases and Slumping Prices?
Experts say additional interest rate increases will further constrict the U.S. economy, which has experienced two consecutive quarters of negative GDP this year and by some counts is either already in or on the verge of a recession. As such, if the Fed continues to tighten its monetary policy during its September meeting, we can expect to see markets react negatively, including crypto. But that doesn’t mean you should drastically alter your long-term crypto investment strategy.
As with traditional investments, you want to avoid buying high and selling low, which is the impulse move to make when the market starts panicking. Especially if the U.S. enters a longer-term recession, staying the course on your long-term investments is your best bet.
“The trend of risk assets being hit by interest rate hikes shows no sign of abating,” said Bitfinex Market Analysts. “Therefore, we can expect bitcoin and ethereum to be negatively impacted by the monetary policy of the Fed. That said, the Fed has become adept at telegraphing its intentions, and arguably much of the expected Fed policies are already in the price.”
As always, nothing is a guarantee when it comes to crypto – a market that notoriously plummets to a valley as swiftly as it reaches a peak, sometimes within the span of mere days. Bitcoin, ethereum, and other altcoins are risky assets, which become more volatile the more uncertainty there is economically. Bitcoin’s teetering prices over the last couple of days is emblematic of that volatility.
“We all thought that bitcoin was going to be an inflation hedge, but it turns out in times of war, the safe haven is still the U.S. dollar, which projects military might more than decentralized computer networks like bitcoin,” said Dr. Martin Hiesboeck, head of blockchain and crypto research at Uphold, a global multi-asset trading platform that lets users trade crypto, fiat currencies and precious metals.
Investment experts recommend that you dedicate no more than 5% of your investments to crypto – and that’s with a high risk tolerance when times are good. During these tumultuous times, it’s best to play it safe.
Correction: An earlier version of this article incorrectly stated that Bitfinex was based in Hong Kong. Bitfinex is based in the British Virgin Islands.