Bitcoin, Another Asset in Fear of the Federal Reserve

A series of rate rises by the U.S. central bank will also affect cryptocurrencies

The most popular cryptocurrency has ceased to be independent and has become another asset tied to the market, according to an analysts..
February 04, 2022 | 02:40 PM

Mexico City — Volatility remains in the air, with stock markets showing significant pullbacks at a crucial moment, as the U.S. Federal Reserve moves to tighten monetary policy.

In late January the market unleashed a burst of volatility amid the uncertainty regarding the number of interest rate rises the Fed plans, with some forecasts, such as one by analysts at Bank of America, expecting up to seven hikes this year.

Although the market managed to recover some of the losses suffered on January 28, indexes such as the Nasdaq Composite (NDXL) and the S&P 500 have posted accumulated year-to-date losses of 9.69% and 5.30%, respectively.

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Bitcoin (XBTUSD:CUR) has so far posted a year-to-date loss of 12.44%, its performance beginning to demonstrate that the asset is no longer detached from the market, and the apparent independence enjoyed by crypto is gradually waning.

Instead, Bitcoin has begun to show a positive correlation with the stock market.

At the Fed’s November meeting, when the withdrawal of stimulus support was announced, Bitcoin was priced at $62,970.23, but as the first upward movement of the U.S. benchmark approaches the price has begun to drop, trading at $37,167.04 at the close of trading on February 3, a loss of 40%.

“The decline in the price of Bitcoin is attributed to the feeling of uncertainty on the part of investors about the reduction of liquidity by the Fed”, Humberto Calzada, chief economist at Rankia Latam, told Bloomberg Línea.

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He said the tightening of U.S. monetary policy not only has an impact on the stock market, but also on speculative assets such as cryptocurrencies.

Read More: Imagine There’s No Crypto. It’s Too Easy If You Try

In 2017, when the cryptocurrency was enjoying its first period of glory, reaching a then-historic high of $19,650, it was considered a safe haven asset, despite not having the characteristics of an instrument of this type.

Calzada said that the cryptocurrency even showed a negative correlation with inflation; however, the Consumer Price Index in different economies have been at their highest levels in the last 40 years, while the price of crypto has decreased.

For independent analyst Cipactli Jiménez, the increase of liquidity in the market has caused investors to increase their positions, and has also generated the entry of new players.

“It has to do with the fact that there is already a lot of institutional money in Bitcoin. It has become just another asset in the market,” Jiménez told Bloomberg Línea.

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This correlation, although not in the same proportion, could also be seen with the phenomenon of Meta Platforms’ Facebook (FB), whose shares plummeted nearly 24% on Wednesday, while Bitcoin slipped 3%.

The main factor is institutional investors, according to Jimenez.

Tech companies Snap (SNAP) and Pinterest (PINS) have seen their shares rally on Friday, pulling back from Thursday’s slump amid fears of the tech sector’s less than rosy prospects.

Read More: Facebook’s Cataclysm Was a Win for Capitalism

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Meanwhile, Bitcoin put the brakes on its downhill run and began to show slight gains, closing at $37,316.56, a 1.07% rise.

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But so far this year, Bitcoin has seen its price slide by 19.73%, although that decline is more stable when seen within the high-volatility context that characterizes cryptocurrencies, and which is a consequence of their high market value.

According to the CoinMarketCap portal, Bitcoin has a $704.63 billion market value, positioning it as the largest currency within a universe of 9,341 cryptocurrencies, plus those that will emerge.

In Analysts’ Sights

Going forward however, the behavior of the cryptocurrency will depend on the volatility of the market, according to Rankia’s Calzada.

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“If that volatility remains relatively stable, what we could see is a stagnation in Bitcoin’s behavior, for example, a sideways behavior towards the remainder of the year,” he said.

But in the event of greater volatility, the price of the digital currency could show significant changes, he added.

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