The crypto market responded quickly and predictably to the latest Fed rate increase Wednesday afternoon.
Both bitcoin and ethereums prices dipped immediately following the Feds announcement that it will increase interest rates by another 75 basis points. The crypto market was already in the midst of a rough week. On Monday, both tokens had fallen more than 10% over the last week.
Crypto has been closely trailing macroeconomic events, and over the last year, the market has consistently reacted negatively to rate hikes. In a matter of minutes on Wednesday, bitcoins price dropped from roughly $19,500 to $18,900. Ethereum saw a more modest price drop, falling more than $50. Both drops signify a more than 3% drop after the Fed made its announcement.
After an initial rebound immediately following those drops, bitcoin fell back to around $18,500 and ethereum fell back below $1,300 late Wednesday afternoon. But these drops were still relatively small compared to previous Fed rate increases. So what gives? It has to do with the markets expectations, according to experts.
Everything is relative to expectation, not exactly what happens, but what happens relative to expectations, said Joel Kruger, a Market Strategist at LMAX Group, a financial technology firm headquartered in London that operates foreign currency and crypto exchanges. Short of some wild price swings in the immediate aftermath, things have played out as expected.
Heres what investors need to know about whats happening with crypto today.
How Market Expectations are Driving Crypto Prices Right Now
Experts anticipated that the Fed would raise rates by 75 basis points. Because those predictions came true, the crypto market didnt see extreme volatility in its prices today, at least nothing out of the ordinary. This is in contrast to July when the Fed announced its first 75 basis point hike (which was significant).
The Fed has remained consistent in its message throughout this year. Fed Chairman Jerome Powell shared hawkish sentiments indicating more aggressive action might be taken in the future toward inflation and further rate increases in late August. As such, Wednesdays news was perfectly in line with expectations, and thus the crypto market didnt experience a big shake up, experts say.
Its a bit of a nothing burger, said Andy Long, CEO of White Rock Management, a digital asset mining company headquartered in Switzerland. There was a 10-20% chance of something a bit more hawkish, but that didnt happen. Everybody expected 75 [basis points], and so you can see this afternoon that downward pressure relaxing a bit.
Long says well continue to see short-term impact on crypto prices from Fed rate decisions and economic news, but that expectations are already largely priced in before news drops.
Economic news regarding inflation has been particularly important for the crypto market, since thats whats driving the Fed to hike rates in the US. As such, crypto has been reacting negatively to inflation reports as of late. For example, crypto prices fell after the U.S. Bureau of Labor Statistics released August inflation data, with bitcoin prices dropping 4% and ethereum 7% over the following 24 hours at that time.
This marks the Feds fifth consecutive rate hike. If inflation doesnt alleviate, its possible the Fed will become more aggressive and drive up rates by a higher number during their final two meetings of the year. That could spell out even steeper price drops for crypto, especially if theyre out of line with market expectations.
Just how low crypto prices can go this year, though, is still up for debate. Some experts contend that bitcoin is still poised for a massive drop off into the $10,000 area this year, with or without bad news from inflation and the Fed.
Long doesnt think well see bitcoins price hit 4-digits again, but dips to around $13,000 may not be out of the question.
What Should Crypto Investors Do in the Face of Inflation and Fed Rate Hikes?
Cryptocurrency is as volatile as investments come, and the current economic climate has supercharged that. With more rate hikes on the horizon and a potentially incoming recession, experts anticipate more price drops in the crypto market, though that impact may be short-lived if they are in line with market expectations.
As such, experts suggest you stay the course on your long-term investments whether crypto or otherwise and avoid selling when prices dip. Youre likely to see steep price drops in the coming months, especially if inflation doesnt improve following the Feds fifth rate hike.
We just have to ride the short-term volatility, Long said, and if you believe in the long-term, which I do, you can be long-term bullish.
Investment experts recommend that you dedicate, at most, 5% of your portfolio to crypto. Additionally, experts caution that you should only invest what youre OK with losing, as crypto prices are notorious for gyrating wildly and suddenly.