This week, bitcoin and cryptocurrency prices sank after the Federal Reserve released the minutes of its December meeting, which revealed a policy shift that does not bode well for cryptocurrencies.
As of now, the price of bitcoin is down 9% to $38,040 for the week, down from around $41,500 after the news broke. The world’s largest cryptocurrency has dumped more than a third of its value from its November peak.
Meanwhile, the rest of the cryptocurrency market has followed the lead of bitcoin. Ethereum (ETH) price is down 10%, Binance Coin (BNB) price is down 11.5%, and Solana (SOL) price is down 14%.
What is this fuss?
At the end of last year, the Fed had a point. Federal Reserve Chairman Jerome Powell ate his words and admitted that inflation is not “temporary”. The minutes revealed that most Fed officials are now warning of higher inflation than previously expected.
Inflation naysayers-turned-hawks are now preparing to take swift action.
“Participants generally noted that given their individual expectations for the economy, labor market and inflation, an increase in the fed funds rate may be warranted sooner or at a faster pace than participants previously anticipated,” the minutes read.
As recently as last March, the Fed pledged not to raise interest rates until 2024. Today, its officials decided on three rate increases this year alone. The market sees a strong possibility that the first rally will be coming at the next Fed meeting in March.
“This will be the biggest hardening shift in point plot history,” said Laura Rosner Warburton of Macropolicy Perspectives.
why does it matter
There is a heated debate among investors over whether cryptocurrencies are an alternative to gold, a store of value that fights inflation, or a risky asset that functions more like an emerging technology stock. This question is especially important today because higher rates hurt growth stocks the most.
Bitcoin proponents argue that its limited supply and decentralized nature mean that policy makers cannot print it and devalue it like fiat currencies. According to this logic, cryptocurrencies are supposed to beat inflation and retain purchasing power.
Meanwhile, crypto naysayers point to bitcoin’s price action, which, at least for now, hints that this asset class acts more as a technical stock than a store of value that fights inflation.
In fact, the recent decline in Bitcoin coincided with a rise in the 10-year Treasury yield from 1.52% on December 31 to 1.71% currently. Cryptocurrency prices are closely related to the Nasdaq index
If this pattern continues into the future, bitcoin and other cryptocurrency prices could continue for a shaky year — with all major central banks preparing to raise interest rates faster than expected to tame historically high inflation.
Stay ahead of coding trends with Meanwhile in the market…
Every day, I come up with a story that explains what is driving the cryptocurrency markets. Sign up here to get my analysis and coding choices in your inbox.