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Bitcoin
Bitcoin rose to start the year, but there are reasons to believe the gains may be unsustainable.
The time of dreams
Bitcoin
and other cryptocurrencies rose along with other risky assets on Wednesday after the Federal Reserve raised rates by a quarter point.
This is another rate hike, but a marked slowdown in the pace of tightening of financial conditions after a series of much larger hikes last year. The Fed also reiterated its projection that it would raise rates at least twice more.
Markets rose during Fed Chairman Jerome Powell’s question-and-answer session with reporters, during which he noted that inflation had so far declined rapidly and that the decision to raise further rates would depend on upcoming economic data.
The price of Bitcoin has risen around 1.5% in the past 24 hours, hovering around $23,400. The biggest digital asset soared at the start of the year, gaining 40% as cryptos benefited from improved investor risk appetite. As Bitcoin remains just a third off its late-2021 peak, traders are growing optimistic that the bottom of a brutal bear market has already been reached – following FTX’s shock bankruptcy in November – and cryptos are about to march higher.
“Crypto fundamentals take a back seat here and the main driver is the overall appetite for risky assets,” said Edward Moya, an analyst at brokerage Oanda. “Bitcoin appears to have massive resistance at the $24,000 level, so if the rally stalls after the Fed tech earnings and mega-cap fireworks, consolidation towards $20,000 could occur.”
Indeed, Wednesday’s results of
Metaplatforms
(symbol: META)—and its peers
Apple
(AAPL),
Alphabet
(Google T
Amazon.co.uk
(AMZN) Thursday – will hit sentiment for tech, likely moving into cryptos.
But the spotlight is on the Fed. Decades-high inflation and rising interest rates have been a major headwind for Bitcoin over the past year as cryptos become more correlated to equities amid an unfavorable macroeconomic backdrop for risk-sensitive assets. Investors hope the worst is over.
In its statement accompanying the rate hike, the Fed retained language indicating that it expects “continued increases” in the target range for the fed funds rate. The statement removed some language suggesting the Covid pandemic and events in Ukraine were contributing to inflationary pressure.
Crucially, during his remarks to reporters, Powell said he believed markets were already reflecting significantly tighter financial conditions. He attributed market rate expectations, which are more dovish than those of Fed officials, to investors’ more optimistic view of how quickly inflation could decline.
For digital tokens and other risky assets, that added up to a substantial rally as Powell spoke. Beyond Bitcoin, Ether, the second-largest crypto, has risen almost 2% in the past 24 hours to $1,619.50. Smaller tokens Cardano and Polygon rose 5% and 10% respectively after the Fed’s release, after being earlier lower in the day.
Crypto’s recent rally largely appears to be built on sand, with Bitcoin’s stunning jumps fueled by low liquidity and technical factors, including short pressure pushing prices higher, not organic demand. These same trends that helped push prices up could accelerate a sell-off.
Write to Jack Denton at jack.denton@barrons.com
