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After a brief rally, Bitcoin
BTC
and other cryptocurrencies pulled back again this week.
The bitcoin price retreated to nearly $40,000, and is now 5.5% down from this week’s high. Ethereum’s price dropped 5.6%, BNB
BNB
3.3%, terra 1.1%, solana 5.2%, cardano 3.8%, XRP
XRP
6.9%, and dogecoin 6.5%.
The crypto market dipped after Fed Chair Powell’s remarks yesterday. At an IMF economic debate, Powell reaffirmed the Fed’s mandate to rein in inflation at any cost and warned about more aggressive rate hikes as soon as next month.
“It is appropriate in my view to be moving a little more quickly… I also think there is something to be said for front-end loading any accommodation one thinks is appropriate. I would say 50 basis points will be on the table for the May meeting,” he said.
That may not bode well for crypto.
[Ed note: Investing in crypto is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Federal Reserve Board Chairman Jerome Powell
Getty Images
Zooming out
Bitcoin and other major altcoins are no longer just a fringe asset class out of touch with economics. As the adoption of digital assets has gone mainstream, their correlation to macro forces has picked up.
As such, Goldman Sachs analysts believe cryptos will react to the Fed’s actions as much as public markets, if not more: “These assets will not be immune to macroeconomic forces, including central bank monetary tightening,” Goldman Sachs wrote in a note.
The question is what the affect will be.
There’s a heated debate among investors about the role of crypto as an asset class. It attempts to answer whether bitcoin and other cryptos are a “risk-on” or “risk-off” investment. As I recently wrote:
“Bitcoin’s proponents argue its limited supply and decentralized nature means that policymakers can’t print it up and depreciate it like fiat currencies. By this logic, cryptos are supposed to weather inflation and retain purchasing power.
Meanwhile, crypto naysayers point to Bitcoin’s price action, which, at least so far, hints this asset class is acting more like a tech stock than an inflation-fighting store of value.”
To settle this debate, Coindesk’s George Kaloudis did an in-depth analysis, which looked into bitcoin’s price correlation to riskier equities and inflation news. He found that even the safest store of value among digital assets still behaves much like a speculative stock.
“While bitcoin’s hard money properties make it a risk-off asset for its supporters, investors see a risk-on asset because of its volatility and technology-like asymmetric price upside. When investors want to cut risk, they sell stocks alongside bitcoin. So bitcoin isn’t a risk-off or risk-on asset yet. Instead, I think it’s better to call it “risk everything,” he concluded.
Looking ahead
During the debate, Powell likened his position to his predecessor Volcker’s dilemma in 1979 when he had to raise rates to ~20% and tame inflation at the cost of sending the economy into a double-dip recession.
That sends a stark message to investors that Powell is taking inflation seriously. And that’s not good news for “risk-on” assets because, in short, tightening affect the riskier corners of the market the most. (I explained that here.)
So if inflation doesn’t go away—which is likely given the war in Ukraine is nowhere near the end—and Powell stands by his hawkish views, risk assets, including crypto, could be in for a shaky year.
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