Bitcoin's current downturn resembles its state prior to the Fed's first rate hike in March 2022, prompting speculation about a potential relief rally before further declines.
By James Van Straten|Edited by Oliver Knight18 min ago2 min readMake preferred on ShareShare this articleCopy linkX (Twitter)LinkedInFacebookEmailMake preferred on BTCUSD (TradingView)SummaryShow- The Federal Reserve increased interest rates by 25 basis points on Wednesday, marking its first hike in over three years.
- At the time the Fed initiated hikes in 2022, Bitcoin was approximately 40% below its peak from November 2021, later seeing an 18% rally before experiencing a 50% decline.
- Markets are anticipating an additional 75 basis points of rate increases over the next six months, with rising oil prices posing risks to inflation control.
On Wednesday, the Federal Reserve raised interest rates by 25 basis points, adjusting its benchmark range to between 3.75% and 4.00%, which marks the first increase in over three years. The markets are projecting another 75 basis points of tightening over the next half-year.
Historically, a singular rate hike is uncommon. Since 1994, the Fed has only enacted a single hike on one occasion, and instances of single increases have been rare throughout the 12 tightening cycles since 1955.
For Bitcoin, the relevant historical context is quite limited. While Bitcoin navigated the tightening cycle that started in 2015, the less mature market and lower liquidity make those comparisons less reliable. The tightening cycle of 2022 presents the most relevant comparison due to a more established market structure.
There are noticeable parallels to 2022. Bitcoin reached a peak of around $69,000 in November 2021, and was down about 40% when the Fed first raised rates in March 2022. Currently, Bitcoin is approximately 40% lower than its October high of $126,000.
After the initial hike in March 2022, Bitcoin experienced an 18% increase over the next 12 days, followed by a drop of around 50%. This suggests the possibility that another relief rally could be followed by a drawn-out bear market. However, the limited evidence from one comparable cycle means conclusions should be approached with caution, especially as Bitcoin's decline in 2022 coincided with losses in equities, bonds, and metals, alongside significant challenges in the crypto sector.
The rationale behind the Fed's hike on Wednesday was primarily due to inflation, which has remained above 2% annually for over five years. However, core inflation, excluding food and energy costs, has decreased to 2.4%, its lowest level in five years, indicating some progress.
Yet, this progress is now threatened by an energy crisis. Geopolitical tensions in the Middle East have driven oil prices, both WTI and Brent, above $100 per barrel, which may reignite inflation concerns and hinder growth. Additionally, global bond yields have increased, with the U.S. 10-year Treasury yield reaching 5%, further tightening financial conditions and impacting risk assets.
Bitcoin's bear market is nearing the one-year mark. Will this new cycle of rate hikes extend the downturn?
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