What happened
Cryptocurrencies and crypto stocks sold off as investors digested recent policy moves by the Federal Reserve yesterday that are under intense scrutiny from the market right now.
Over the last 24 hours, the price of Bitcoin (BTC -8.01%), the world’s largest cryptocurrency, had fallen nearly 8% as of 2:14 p.m. ET today. Meanwhile, shares of the Bitcoin miner Riot Blockchain (RIOT -11.93%) traded more than 12% down on the day, and shares of the large cryptocurrency exchange Coinbase Global (COIN -12.22%) had fallen roughly 11.5%.
So what
Cryptocurrencies and crypto stocks are trading with volatility after the Federal Reserve yesterday raised its benchmark overnight lending rate, the federal funds rate, by a half point, the largest rate hike by the Fed in two decades.
The Fed is trying to tame inflation, which has been extremely high for several months now. The agency also laid out details for its previously disclosed plans to reduce its nearly $9 trillion balance sheet, which ballooned during the pandemic, as the Fed did a lot of bond buying to support the economy during the pandemic. The Fed said it is planning to begin running off $95 billion of bonds from its balance sheet per month starting in September, which means it could reduce its balance sheet by more than $1 trillion per year.
Image source: Getty Images.
Following the Fed’s decision yesterday, the market reacted positively with the Dow Jones Industrial Average adding 900 points. Investors seemed happy that Fed Chairman Jerome Powell said the Federal Reserve was not considering a 0.75% rate hike at this time. But today, the market reversed course, with the Dow falling almost 1,100 points as of this writing.
“What happened yesterday was great for traders, but we should expect what has continued to happen for the past several weeks,” Mike McGlone, a commodities strategist with Bloomberg Intelligence told Yahoo! Finance. “That is, the Fed emboldened against inflation and risk assets going down.”
In other news, Coinbase recently opened its platform for non-fungible tokens (NFTs) to the public after only releasing it to a small group of people in April. Bloomberg also recently reported that Coinbase has abandoned its plan to try to acquire the large Brazilian crypto exchange 2TM. The deal would have propelled Coinbase’s international expansion plans to acquire more users. In a statement, a Coinbase spokesperson said the company is “committed to the Brazilian market and has local tech and business leadership in place.”
Now what
In the past after Fed meetings that have involved noteworthy policy decisions, Bitcoin and other cryptocurrencies have acted similarly to tech stocks, which seems to be the case here as well. Due to this, I have some concern that rising interest rates and the Fed reducing its balance sheet, effectivity pulling liquidity out of the economy, may not be so great for cryptocurrencies.
The reason for this is that as the Fed floods the market with bonds, that will make the supply of bonds increase, which could drive down bond prices and then increase bond yields, which have an inverse relationship to bond prices. The more yield safer assets like U.S. Treasury bonds pay out, the less appeal there is likely to be for riskier assets like high-growth tech stocks and cryptocurrencies. It’s also much harder to value Bitcoin than other assets.
Of this group, I am much more a fan of Coinbase, which provides critical infrastructure to support the crypto industry, which I also don’t think is going anywhere.