Bitcoin continues to lose steam as minutes from the Federal Reserve’s December meeting released earlier this week indicated an opportunity for faster policy tightening.
The leading cryptocurrency fell to $41,012 during the Asian Friday session, hitting its lowest level since September 29 with a weekly decline of 12%, according to CoinDesk data.
The downward movement gained momentum on Wednesday after the Federal Reserve’s meeting minutes revealed policy makers were discussing a significant rate hike along with a faster pace of balance sheet normalization, called quantitative tightening (QT) – the opposite of liquidity-enhancing balance sheet expansion. The hawkish tone weighed on stocks, with tech stocks bleeding out for a second day in a row on Thursday.
“Bitcoin has been trading as a risk/off risk asset lately and it appears to be tracking a decline in stocks,” Jeff Dorman, CIO at Arca, told CoinDesk in a Telegram chat.
About $200 million of long positions have been liquidated in the past two hours, sending the spot price lower, said Laurent Kechas, an ETF expert and director of CEC Capital. Kishasi added that leverage remains high and a further drop could be seen below $40,000, and more if bond yields continue to rise on the back of the Fed’s hawkish stance.
The common narrative is that the Fed’s plans to shrink its balance sheet and simultaneously raise interest rates could lead to prolonged asset price deflation.
“It’s time to assess the conviction you have of whether positive interest rates can damage the equity portfolio and see more global downward pressures,” Kechas said. “A 60/40 equity-to-bond portfolio mix means that if a 60% drop in stocks, large fund managers automatically sell the bonds to maintain the ratio.”
“So if the Fed allows stock prices to fall, it will increase borrowing costs for governments because as bond prices go down, yields go up!!! This can lead to more selling in bitcoin,” Kechas added.
On Thursday, the two-year US Treasury yield, which mimics short-term interest rate and inflation expectations better than the 10-year yield, rose to a 22-month high of 0.87%. The short-term yield more than doubled to 0.76% last quarter, according to TradingView. Yields could rise further if US nonfarm payrolls data due at 13:30 UTC on Friday shows that the pace of job additions nearly doubled to 400,000 in December, as expected. That would validate the Fed’s latest hawkish pivot.
According to Brent Donnelly, Head of Spectra Markets, the macro story has worsened for cryptocurrencies in the past few months. Keep the crypto bearish as the Fed’s QT plan accelerates. “The macro story for cryptocurrencies has worsened since I started talking about the crypto bear in November,” Donnelly said in an analysis note. Subscribed to Twitter.
“Markets tend to regard QT as the more risk-negative brand of policy tightening than the Fed because it reflected strong monetary easing that leads to Pavlov’s ‘buy-everything’ reaction every time the Fed eases,” Donnelly said.
Some observers suggest otherwise. “Fears of a prolonged bear market in stocks and digital assets may be exaggerated as markets have historically remained resilient during tightening cycles,” said Arca’s Dorman.
In fact, Bitcoin has largely remained bidding during the main part of the previous tightening cycle that began in December 2015 and ended in December 2018. The cryptocurrency rose from nearly $350 to nearly $20,000 in the two years to December 2017 before entering a bear for a period of time. general market.
Moreover, stock markets came under pressure in the last quarter of 2018 — nearly two years after raising rates, Dorman said on Twitter.
“Bottom line – the Fed raising rates is not the cause of big, prolonged market selloffs…after very long Fed raising cycles when markets typically experience persistent declines and recessions occur,” Dorman tweeted.
Bloomberg’s Mike McGlone expects Bitcoin and cryptocurrencies to benefit from the tightening cycle. “Expectations of a Fed rate hike in 2022 may support a win-win scenario for Bitcoin versus the stock market,” McGlone said in a research note published Thursday. It is a question of how long the bull market lasts, and we see the benchmark cryptocurrency coming.”