Investors from all corners of the stock market have emerged quite strong after the Fed announced on May 4 that it will be raising its base rates by 0.50%, the highest percentage in more than two decades. The last time the Fed was this aggressive was back in 2000 - but the economic and geopolitical environment is looking a lot different than what it did back then.
In the aftermath of the announcement, the weeks that followed have undergone some choppy conditions, with the U.S. benchmark, the S&P 500 coming down more than 20% from its January high. Amid the recent tech sell-off, and the Bureau of Labor Statistics Consumer Price Index (CPI) climbing by 1%, seeing inflation reached a record high of 8.6% - the highest it’s been since December 1981.
The Fed’s plans to raise rates are part of their arsenal to lower consumer spending, and cool down lending to suppress rampant inflation.
“The decision by the FOMC comes at a brutal time in the market. Investors, traders, and CFD traders utilizing leverage are still trying to make a full rebound from the last two years of crisis. As we expect ongoing rate hikes, to help damper rampant consumer inflation and a tight supply chain, crypto, along with other commodities are in for a rocky year of trading,” says owner Justin Grossbard of Compare Forex Brokers.
While the markets were able to deliver positive returns after the meeting on May 4, investors were kept on the edge over whether the Fed’s are planning a higher rate increase of 0.75%. Luckily, Fed Chair, Jerome Powell ruled out that such a rate hike wouldn’t be possible this year, but investors would still see more hikes in the coming months.
The recent rate hikes and tightening of the monetary policy are part of the Fed’s arsenal that is used to help cool down overspending in the consumer market and increase the cost of borrowing.
Considering how investors reacted to the recent rate hikes, crypto traders have been met with a different reality at this point.
Originally, crypto buyers used to purchase Bitcoin and other cryptocurrencies as a way to hedge inflation, and with the current rampant inflation, a wave of new buyers and traders are jumping on to purchase BTC, ETH, and other cryptos at lower prices.
When we look at how the Fed hikes will potentially impact the crypto market and other digital assets, one thing is for certain - buying now and holding is better than waiting for the market to cool down.
Bearish Investors and Traders
The crypto market has been riding out some choppy waters in recent months, with BTC down 59.14% year-to-date, and ETH coming down more than 54.65% from its 52-week high.
In a more shocking turn of events, heavyweight crypto, BTC has come down roughly 58% in Q2 2022, the sharpest fall since Q3 2021.
The crypto world has been challenged from all sides, with BTC falling roughly 70% since its high of $69,000 in November 2021. BTC prices have fallen below $19,000, with major price swings dipping close to 7.8%. These shattering prices have wiped out more than 80,000 BTC millionaires from the market thus far.
On the Ethereum side, prices have also tumbled, drifting closer to $1,000. Some experts currently suggest that ETH will enter the $700 correction territory, with a total market cap currently standing at $125 billion.
What’s keeping investors interested at this point is whether or not the Fed hikes will impact crypto even further.
For starters, investors are expecting further base point hikes in the coming months, but some analysts are skeptical that these increases, coupled with rampant inflation would cause another frenzy in the crypto market as experienced in 2018.
Yet, nothing is the same as it was in 2018 when we saw investors and companies rushing to become part of the blockchain revolution which ultimately led to the crypto market crash and the infamous crypto winter of 2018.
In the last few weeks, crypto has nosedived even further, with the crypto market cap losing more than $1.3 trillion, shedding roughly 60% of its value in the first quarter of 2022. The collapse of Terra, Celsius and now more recently, Three Arrows Capital marks perhaps the starting phases of the crypto winter.
As buyers look for new ways in which they can hedge inflation, crypto could soon look like a viable option - but in the current climate, that’s not a sustainable choice as cryptocurrencies are treading deep waters of high volatility.
The premise is that although continuous Fed hikes are on the horizon, the price may plateau and could see less activity than what some analysts are expecting.
The broader picture reveals that unless the crypto market can pass quantitative tightening, major cryptos, including BTC, will struggle to see huge price jumps as market activity dwindles.
Then there’s also the fact that the crypto market is still in its early days, but has already become such a key player in global economics. With an infant market presenting traders with high volatility, some may consider it too risky to either buy or sell - keeping prices stagnant.
There is of course the notion that some investors might feel the impact of the Fed’s decision is hurting the overall performance of the market and their portfolios, sparking a sudden burst in sell-offs. The likelihood thereof is slim, and neither is it non-existent - there’s a bit of both.
What currently matters the most is whether investors have the free-flow cash to invest in crypto? Of course, experts suggest that in a market with such high volatility, buyers should only spend money they are comfortable with losing - which in this case isn’t a lot.
Traders are in a swing position - for one being that holding crypto for the long-term can still take years before it makes any significant moves. The latter is that selling off any crypto now could cost you more than what you bargained for.
It’s clear how much impact the Fed’s announcement has made on the crypto market, and it’s a stark example of what the year ahead will look like as well.
To Finish Off
Whether you decide to purchase crypto or rather sell what you currently have, be sure over your decision, as major hits and misses can become a costly error.
BTC, ETH, and other rising cryptos are all long-term investments that buyers and investors should hold until the market is ripe for the picking - and that time is not right now.
The Fed will increase rates later again this year, but by that time, the price of crypto would've significantly moved again. But now that investors and novice traders know how to manipulate their investments with crypto, it’s become a bit of a gamble over what the next few months for the crypto market will look like.
Nevertheless, it remains a long-term investment, and if you’re an investor that believes in the possible future of crypto, it’s safe to say that you should hold onto it until the right time comes. For the latter part, consider the financial risks of selling, and then having to repurchase when the price goes up again.
It’s unpredictable, but it depends on what you think would suit your holding position best at the moment.
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