Crypto Traders Divided Over Impact of Impending Fed Rate Hike on Bitcoin

The US Federal Reserve (Fed) is likely to raise its benchmark cost of borrowing by 75 basis points (0.75%) on Wednesday in an ongoing effort to drain liquidity to curb inflation. Crypto traders are divided on how bitcoin (BTC) would react to rising rates.

Griffin Ardern, volatility trader at Blofin, a cryptocurrency asset manager, is forecasting a decline in bitcoin price after the Fed hiked interest rates by 75 basis points (bps) to 2.25% from 2.5%.

“Since the overall risk level of the cryptocurrency market has not returned to a reasonable level, it is highly likely that the price of BTC will fall by more than 10% after the Fed rate hike,” Ardern said.

The Fed’s liquidity-draining measures, such as rate hikes and balance sheet liquidation, have shaken asset markets in recent months. Bitcoin is down more than 50% since the central bank launched the tightening cycle in March.

“Bitcoin and the broader cryptocurrency market may see another rally after the 75bps rate hike, after which we expect markets to trade sideways as ether (ETH) may outperform in forecasting the merger,” said Dick Lo, founder and CEO. from the quantitative trading company TDX Strategy.

Perhaps both traditional and crypto markets have priced in the impending 75 basis point hike, with Fed officials hinting at such a move in recent weeks.

Bitcoin fell 7% in the week leading up to Wednesday’s Fed event. “We see participants taking a risk-free approach ahead of the FOMC decision as expected,” Lo replied when asked about pre-Fed flows in the cryptocurrency market.

At the time of going to press, Federal Funds futures, derivatives based on the benchmark interest rate, have priced in the probability of a 75 basis point shift to 75%, in addition to a 25% probability of a 100 basis point increase.

Trader and analyst Alex Kruger said the cryptocurrency market could see a small recovery after a 75 basis point rate hike, but warned of a decline if the central bank surprises with a 100 basis point base. Earlier this month, however, Fed officials had pushed back a full percentage point increase.

Beyond tariff increases

The focus will be on policy makers’ concerns about the risks of unemployment and the looming recession in Europe.

The market has convinced itself that inflation has peaked and that after July the Fed will opt for slower rate hikes, possibly next year to cut rates. This appears to be evidenced by the 28 basis point drop in 10-year Treasury yields over the past seven days. At the time of writing, the return was almost 2.8%.

Risky assets, such as bitcoin, could soar if the policy statement from the Fed or Chairman Jerome Powell appears increasingly concerned about recession risks, bolstering market expectations for a policy pivot (of tightening easing) in 2023.

However, observers expect the Fed to continue to focus on controlling inflation while downplaying fears of a recession.

“There is no doubt that Powell will turn, but the pivot will not be this year, at least until November, and there will be no significant cut in rate hikes (like 25 basis points). Fed needs to join them in expressing its determination and confidence in fighting inflation to win the midterm elections in November,” Ardern de Blofin told CoinDesk.

According to Jon Turek, author of the Cheap Convexity blog, the Fed should stick to the June scenario.

“We are in this inconsistency as the Fed reacts to the June CPI and the market is trading in the European recession. The Fed will side with the June CPI and I think to a greater extent than risk assets suggest at the moment,” Turek said in a Fed Insights released Tuesday.

Leave a Comment