How The Fed’s Actions Might Affect the Cryptocurrency

The mood for Bitcoin is getting a bit dark. The regulator announced on December 15 that the economic stimulus program would be scaled back.

Could this announcement increase the chances of other crypto assets crashing and lead us to a more profound adjustment in the crypto market?

Bitcoin Market Enters ‘Extreme Fear’

With the Fed’s monetary policy meeting approaching, there was a consensus in the market that the market was down.

As the Federal Reserve plans to meet on Wednesday to decide on quantitative easing and interest rates policies, the bitcoin market has fallen to its toes in the realm of “extreme fear.”

Bitcoin is trading at $48,000, much lower (30% lower) than the $69,000 record set in November.

According to various sources, the analysis of the fear and greed index of the overall market position ranges from zero to one hundred. Market sentiment is frightening the closer the indicator gets to its bottom line.

The opposite is true regarding greed when individuals start buying assets from FOMO (fear of losing). Currently, the scale is at 16, which indicates the extremes of fear.

According to popular media, the general expectation from the Fed meeting is that there is a possibility that the central bank will aim to curb inflation by increasing interest rates.

So the financial markets must be prepared to switch the investment thesis. However, the Fed acted quickly to avoid a rise in consumer prices beyond 2%. However, this move is expected to take effect next year.

At the moment, market forecasts for a quick summary of asset purchases are not hypothetical.

By the end of the previous month, Federal Reserve Chairman Jerome Powell indicated that the Fed’s bond-buying initiative might end sooner than expected amid rising inflation and a stronger US economy.

Powell further added that he and his associates will review whether it would be best to close our purchases a few months earlier than planned.

Central bank to reduce bond purchases

On Wednesday, Bitcoin rebounded towards $49,000 following the Federal Reserve’s announcement to speed up the process of withdrawing stimulus.

According to some analysts, the Fed’s decision has already been included in the price, which means that some traders have already dumped their long positions, which in turn has led to short-term buyers getting attractive price levels.

The Federal Reserve plans to reduce its bond purchases by $30 billion per month. That’s twice as fast as the current withdrawal rate of $15 billion each month.

According to Brad Keon of CoinDesk, some bitcoin traders believe the move will make bitcoin more attractive, making it an inflation hedge.

At the moment, the prices of the digital assets are stabilizing after they were sold earlier in the month.

Over the past 24 hours, bitcoin has gained about 3%, compared to a 14% rise in Solana SOL tokens and a 4% increase in ether over the same time.

According to Delphi Digital, a crypto research firm that appeared in a note on Wednesday, a likely way forward is sideways/volatile price movement towards the end of the year.

However, any spike in volatility or a major risk aversion event penalizing the risky assets will likely pressure BTC and the larger crypto market.

Bitcoin Losses Linked to Acceleration

In the latest correction, bitcoin holders experienced an acceleration of recorded losses (costs falling below the starting price basis). Negative returns can inspire selling in many cases as traders fear further market pullback.

Crypto data company Glassnode notes in a blog post that it is currently noting an acceleration of losses among BTC holders, with more than $1 billion per day trending in two cases during this correction.

The BTC price drop from a permanent high of around $69,000 has led to a more cautious note in the market. According to Glassnode, the opening of losses indicates further sell-off is souring.

However, despite the high losses, blockchain data indicates that a small number of investors continue to withhold bitcoin.

For example, the balance of BTC on exchanges has progressed to decline this year – which may indicate that investors will hold bitcoin in their wallet rather than make it available on the exchange for sale.

Selling bitcoin paid with options

The weekend sell-off of bitcoin and the subsequent bounce show the volatility of the cryptocurrency market and its expanding relationship with traditional asset classes.

Investors said that few of the recent selling resulted from liquidations on alternative exchanges.

It was also launched due to concerns about Federal Reserve policy, market risk, and interest rates, which have been behind many days of swing trading in stocks and other markets.

According to Nicholas Cooley, a DailyForex analyst, there is a link between high-risk and more active stock indices, such as the cryptocurrency market and the Nasdaq. The link wasn’t as strong a few years ago.

Over the past couple of years, Bitcoin has gained a lot of popularity and has become an expanding investment.

A survey by Grayscale Investments shows that nearly 26% of US investors own cryptocurrency.

The same study was conducted two years ago, and this time it did not focus on the number of respondents using bitcoin. Instead, the focal point was about how many people were willing to try the idea.

Investors have committed $9 billion to crypto funds this year.

From $18.8 billion in 2020, the funds’ assets under management increased to $73 billion.

Bitcoin Mood: So what future does Bitcoin have?

Even after the Fed meeting, crypto investors should not give up too soon. Bitcoin still has a future and better things are yet to come.

Sure, there are many challenges emerging at the moment, but there is a chance that things will get better with time.

How is your bitcoin mood? Discuss this and more in our Telegram group.

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