Optimism creeps back into crypto, with the 2022 test still to come

Cryptocurrencies rallied after the Federal Reserve delivered its first interest-rate increase since July 2023, a counterintuitive reaction given the FOMC decision makes interest-bearing investments more attractive.

Bitcoin added almost 1% over the past 24 hours while zcash (ZEC) jumped by more than 23% to a record high.

Traders who remember previous Fed rate cycles, especially 2022, are likely to be cautious, however.

Bitcoin is currently about 40% below its October record high of $126,000. When the Fed began tightening in March 2022, it was also roughly 40% below its record high, the November 2021 peak.

Over the next 12 days, the largest cryptocurrency rallied 18% before sliding 50% for several months, a period that also saw the collapse of crypto exchange FTX.

The relief leg of that pattern has already begun, with bitcoin defying a shift to the downside after the U.S. Clarity Act was shelved, but ETF flows continue to demonstrate weakness, with $746 million exiting spot bitcoin funds on Tuesday and Wednesday alone.

History also argues against a “one and done” rate rise. On only one occasion since 1994 has the Fed raised rates once and then stopped. Futures markets are pricing in a further 75 basis-point increase in the next six months. Goldman Sachs moved its forecast for the next hike forward to October.

The complication is that the Fed is tightening into a supply shock it cannot reach. Core inflation has eased to 2.4%, its lowest in five years, but both Brent and WTI crude are above $100 and U.S. diesel prices hit a record this week, while the 10-year Treasury yield sits at 5%.

Fed Chair Kevin Warsh conceded the point directly, saying the central bank cannot affect individual prices, but can stop relative price changes broadening out.

The early signs of optimism are there, with zcash at a record high and bitcoin holding its ground through both a failed regulatory push and the first rate rise in three years. The 2022 comparison becomes testable at the end of the month, when the rally from four years ago petered out.