How crypto prices may react to the latest Fed decision
Bitcoin and Ether have an interesting setup heading into the Federal Reserve’s latest policy announcement on Wednesday, and Bernstein is keeping a close eye on what the next rate hike (or lack thereof) will do to crypto prices. The Fed will conclude its two-day meeting and announce its latest policy decision at 2pm ET. Most of the market expects the central bank to hike rates another 25 basis points. Others assume there will be no migration. According to Coin Metrics, Bitcoin is up 22% this month and more than 70% for the year. Between the 2023 rally and a recent break in its correlation to stocks — which is lower than it has been in the past two years — Bitcoin is behaving more and more like it was in Crypto’s ‘days leading up to 2020, where it was considered a ‘safe-haven’ and ‘risk- Off” investment,” Bernstein analysts Gautam Chhugani and Manas Agrawal said in a note on Wednesday. “We see crypto closer to its non-sovereign, decentralized roots and as a safe haven in the event of banking and financial fragility,” they added. “That’s a mental model that shows some evidence in recent correlation data.” Still, inflation and Fed rate hikes remain the biggest catalysts for Bitcoin. Here are three scenarios Chhugani and Agrawal are watching that investors can expect prices to react to. 1. The Fed hikes rates another 25 basis points “Crypto sells on this one (little profit booking given the strong past few weeks), but not much because such a move further hurts the banking system,” they said. “A weaker banking system, potentially in need of massive Fed intervention, is bullish on crypto because it reinforces the case for 1. a decentralized ‘store of value’ that cannot be devalued by a central bank (both BTC and ETH). and 2. A case for decentralized financial systems that in this fast-paced, social, digital age of bank runs can be transparent, fast, resilient and allow users to remain in control of their funds through self-custody,” they added. 2. The Fed is pausing its rate hikes – “perhaps temporarily” Analysts called this scenario a “double-edged sword” because while it could make investors concerned about the severity of the banking crisis, they could also interpret the move as a temporary one that involves more stability would allow banks before the Fed resumes its inflationary war.There “could be some immediate positive momentum for crypto markets, but markets would definitely wait and see what else the banking situation entails,” said Chhugani and Agrawal.3. The Fed cuts rate hikes by 25/50 bps Analysts said this scenario is unlikely domestic, noting that while stabilizing banks would be “the right thing” it would also change the narrative about fighting inflation. “Crypto markets may rally on the immediate risk impulse, and it may justify some who have said the Fed changed course after breaking banks,” they said. “But any near-term crypto rally would have a hard time sustaining growth if crypto simply becomes a trading risk.” “We disagree here that risky low yield markets are not good for crypto as they encourage more gambling and nefarious use cases” , they added. — CNBC’s Michael Bloom contributed coverage.