Back \ FXT Analysis \ Cryptocurrencies Dive After US Fed Commits to Tighter Monetary Policy

Cryptocurrencies Dive After US Fed Commits to Tighter Monetary Policy

Continued tightening of monetary policy by the US Federal Reserve sent cryptocurrencies across the board into free fall last week, with Bitcoin and Ethereum both plunging. 

Last Wednesday the US Fed lifted its target interest rate by half a percentage point, for the largest increase in over two decades. 

Cryptocurrencies including Bitcoin and Ethereum fell sharply in the days following the rate hike unveiled last Wednesday, likely due to its impact upon their comparative appeal as investment options.  

Last Friday Bitcoin fell 8% to below USD$35,900, after posting its largest one-day drop since January.  

Bitcoin has shed over a quarter of its price value the start of 2022, and at the time of writing is down nearly 26% year-to-date. 

Ethereum, the world’s second-most popular cryptocurrency, also sustained heavy losses. It fell 7% on Friday to trade at around $2,700, for its lowest level since the middle of March.  

The Fed’s rate hike announcement hammered smaller cryptos as well, including Solana, which dropped 10%; Cardano, which fell 9%, and Avalanche, which plunged 13%. Both Dogecoin and Shiba Inu sustained declines of around 6%.  

Bullion also responded poorly in the wake of the US Fed’s rate hike announcement, albeit to a far lesser degree than top cryptocurrencies.  

Spot prices for gold fell 0.8% for the 1-week period to USD$1,880.86 per ounce. Last week marked the third consecutive week that gold spot prices have posted declines.   

The market anticipates further rate hikes in future, after Fed chairman Jerome Powell signalled the monetary authority’s determination to contain breakneck inflation in the US economy.  

US inflation reached a stunning 40-year high of 8.5% in the month of March. While the market expects inflation to ease significantly in April, it is still likely to remain above the 8.0% threshold.” 

“Inflation is much too high and we understand the hardship it is causing,” said Powell at a press conference last Wednesday. “We’re moving expeditiously to bring it back down.” 

This points to a string of 50 basis point increases in months to come, until the Fed can rein in inflation levels and bring them closer to the target rate of 2%.  

The Fed’s determination to curb breakneck inflation by means of rate hikes bodes poorly for both cryptocurrencies and bullion, who share strong similarities as asset classes.  

Bitcoin and gold do not provide the steady yields that other investment classes offer, such as stocks with dividends, bonds with annual coupons, or even ordinary bank deposits with regular interest payments.  

Investors hoping to profit from their  bitcoin and gold holdings are instead banking solely upon appreciation in the prices of these assets. 

When central banks such as the Fed raise interest rates, this increases the returns provided by yield-bearing assets. The rise in yields heightens their appeal relative to cryptocurrencies and bullion, neither of which generate cash returns.  

It goes without saying that savvy investors should always keep a close eye upon the decision-making of central banks, as this is a chief driver of the way the economy will perform in future.  

This is especially the case for assets such as Bitcoin and bullion however, as any rise in yields serves to directly weaken their appeal as investments and undermine price support.