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Alex Gailey is a journalist who specializes in personal finance, banking, credit cards, and fintech. Prior to…
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If your crypto investments see some extra volatility this week, you can thank the Federal Reserve.
That’s because the Federal Reserve’s next scheduled meeting starts today, with many experts predicting yet another rate increase as the Fed continues its effort to squash stubborn inflation. Expert consensus calls for an increase of anywhere between 75 to 100 basis points to be announced on Wednesday.
If it’s anything like the last few Fed meetings, crypto investors could be in for another rollercoaster this week. Historic price charts show how bitcoin’s price dropped by at least 10% or more following the last three Fed meetings in March, May, and June.
Here’s a closer look:
While historic data doesn’t clearly indicate how markets will react in the future, especially in the volatile and unpredictable crypto market, experts largely agree that investors should expect new volatility this week following the Fed’s expected rate increase announcement. Sentiment in the crypto market already appears slightly bearish to start the week, with bitcoin trading below $21,000 and ethereum trading below $1,400. Both are down more than 5% since this time last week.
“In the near term, we’ve seen bitcoin and other cryptocurrencies generally sell-off with risk assets as the speculative frenzy that defined investing over 2020 and 2021 grinds to a halt,” says Stéphane Ouellette, CFA and founder of FRNT Financial, an institutional capital markets and advisory platform focused on digital assets.
This is happening against the backdrop of mounting recession fears which makes this week’s second-quarter GDP report and earnings reports all the more important. If the second-quarter GDP report on Thursday reveals that the U.S. is in a technical recession, which is defined as two consecutive quarters of negative economic growth, it could lead to “a bunch of mess” in the crypto market, according to crypto expert Wendy O.
“We do know that it’s rumored that we are going to increase rates by 75 basis points. If they only release rates at 75 basis points, we shouldn’t see any type of bad things happening in the market,” O says. “But at the same time, it could get canceled out when the second-quarter GDP report is released.”
Aggressive rate hikes are not positive for crypto prices, and experts say the choppiness will likely continue in the short term.
Risky assets like stock and crypto have been heavily correlated since the start of 2022. Both have been moving in unison and have struggled to gain any momentum this year as investors are pulling away in response to rising interest rates, surging inflation, and a potential recession. If the stock market dips because of the rate hike this week, the crypto market likely will too — and vice versa.
The Fed’s interest rate hike in June was one of many factors that rocked the crypto market in particular, which was already in “crypto winter” mode with prices slashed across the board. Bitcoin and ethereum fell down more than 70% in June since the peak of last year’s bull run.
Investors are keeping a close eye on bitcoin, ethereum, and the crypto market at large to see “possible retest of the June lows,” according to Edward Moya, a senior market analyst at Oanda.
“The majority of crypto watchers are still awaiting further weakness,” Moya says. “As global recession calls grow, the focus will switch to how soon the Fed will be cutting rates.”
It’s difficult to know whether the market has already priced in this week’s potential rate increase, and if the Fed will opt for another 75-basis point rate hike rather than a larger move.
“75 basis points appears to be the consensus, so if we see something notably higher and it kills the equity market, then I would expect the crypto market to follow suit,” says Joshua Fernando, crypto expert and CEO of eCarbon, a blockchain tech company focused on carbon emissions allowances. “Vice versa in the lower rate increase case. More important will be the guidance the Fed gives. If the Fed signals strong rate hikes through 2023, expect more pain in the markets.”
Any significant developments with the Fed, corporate company earnings, or the second-quarter GDP report this week shouldn’t drastically alter your long-term crypto investment strategy.
If anything, it’s a reminder for investors that crypto assets come with additional risk and volatility, especially in times of economic and political uncertainty. Despite the positive momentum over the last week, the crypto market is still no where near where the highs it reached last year — with bitcoin and ethereum still down more than 50% since November.
Given the crypto’s history of volatility, prices are just as likely to fall back down as they are to continue climbing — and it’s extremely difficult to predict with certainty where they’ll go next.
With so much economic uncertainty in the air, now is the best time to play it safe by allocating no more than 5% of crypto to your investment portfolio and investing only what you’re OK with losing. Always make sure your financial bases are covered — from your retirement accounts to emergency savings — before putting any extra cash into a volatile, speculative asset like crypto.
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