The Federal Reserve announced another big rate increase Wednesday afternoon, and the crypto market didn’t take long to respond.
Bitcoin dropped below $19,000 shortly after the Fed’s announcement that it would raise the federal funds rate to a target 3% – 3.25% – the fifth consecutive time the Fed has raised rates this year. Ethereum saw a sudden drop as well, but held above $1,300 for the time being.
The Fed’s moves continue in an effort to cool the economy and slow inflation that’s been driving up prices to their highest levels in decades. The ramifications for each new Fed rate increase continue to play out across the crypto and stock markets, as investors react to an uncertain economic environment.
If these early results hold and it ends up being anything like the last four Fed meetings, crypto investors could be in for another rollercoaster next week. Historic price charts show how bitcoin’s price dropped by at least 10% or more following the Fed meetings in March, May, and June. While the drop following July’s meeting was less severe, there’s a clear pattern of Fed rate increases corresponding to drops in the crypto market.
Here’s a closer look:
While historic data doesn’t clearly indicate how markets will react in the future, especially in the volatile and unpredictable crypto market, it’s a safe bet that investors should expect new volatility next week following the Fed’s next expected rate increase announcement.
Bitcoin and ethereum prices had been on the rise to start the week, before Tuesday’s release of August inflation data sent them tumbling back down below $22,000 and $1,700, respectively. Bitcoin’s drop below $19,000 last week was the lowest its been since June. Neither of the two biggest cryptos has seen significant movement since the July Fed meeting, though a series of mini rallies for each have at least given investors hope that they could be back on the upswing.
“The [Fed’s July] decision provided optimism that the end of tightening is in sight and that triggered a nice rally for risky assets that helped elevate cryptos,” says Edward Moya, a senior market analyst at Oanda.
But an uncertain economic outlook continues to hamper the crypto and stock markets, which have been increasingly aligned with one another in recent months. And the possibility that the U.S. is either in or could soon be in a recession continues to loom large in the minds of Americans.
Why Fed Rate Increases Can Influence the Crypto Market
Aggressive rate hikes are not positive for crypto prices, and experts say the choppiness will likely continue in the short term.
Risky assets like stock and crypto have been heavily correlated since the start of 2022. Both have been moving in unison and have struggled to gain any momentum this year as investors are pulling away in response to rising interest rates, surging inflation, and a potential recession. If the stock market dips because of another rate hike, the crypto market likely will too — and vice versa.
The Fed’s interest rate hike in June was one of many factors that rocked the crypto market in particular, which was already in “crypto winter” mode with prices slashed across the board. Bitcoin and ethereum fell down more than 70% in June since the peak of last year’s bull run.
Investors are keeping a close eye on bitcoin, ethereum, and the crypto market at large to see “possible retest of the June lows,” according to Edward Moya, a senior market analyst at Oanda.
“The majority of crypto watchers are still awaiting further weakness,” Moya says. “As global recession calls grow, the focus will switch to how soon the Fed will be cutting rates.”
In general, it’s difficult to know whether the market has already priced in another potential rate increase, says Joshua Fernando, crypto expert and CEO of eCarbon, a blockchain tech company focused on carbon emissions allowances. But there is more experts are looking to than just another potential rate increase, as well.
“If the Fed signals strong rate hikes through 2023, expect more pain in the markets,” Fernando says.
What Does It All Mean for Crypto Investors?
Any significant developments with the Fed, corporate company earnings, or other economic factors shouldn’t drastically alter your long-term crypto investment strategy.
If anything, it’s a reminder for investors that crypto assets come with additional risk and volatility, especially in times of economic and political uncertainty. Despite the positive momentum over the last week, the crypto market is still no where near where the highs it reached last year — with bitcoin and ethereum still down more than 50% since November.
Given the crypto’s history of volatility, prices are just as likely to fall back down as they are to continue climbing — and it’s extremely difficult to predict with certainty where they’ll go next.
With so much economic uncertainty in the air, now is the best time to play it safe by allocating no more than 5% of crypto to your investment portfolio and investing only what you’re OK with losing. Always make sure your financial bases are covered — from your retirement accounts to emergency savings — before putting any extra cash into a volatile, speculative asset like crypto.