After a brief rally, bitcoin
BTC
The bitcoin price retreated to a little over $40,000, and is now 5.5% down from this week’s high. Ethereum’s price dropped 5.6%, BNB
BNB
XRP
The crypto market dipped in light of Fed Chair Powell’s remarks yesterday. In a panel discussion at the IMF, 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.
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“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
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Zooming out
Crypto is no longer just a fringe, speculative asset class out of touch with economics. As digital assets are becoming more mainstream, their correlation to macro forces is picking up.
As such, Goldman Sachs analysts believe the Fed’s actions will have a strong effect on cryptos. “These assets will not be immune to macroeconomic forces, including central bank monetary tightening,” Goldman Sachs wrote in a note.
The question is what that effect 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:
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“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.
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Looking ahead
At the IMF, 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.
Powell’s remarks send a stark message that the Fed is taking inflation very seriously. That’s not good news for “risk-on” assets because, in short, tightening affects the riskier market corners 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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