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Fed plans to raise interest rates and cut spending – which is why it could have an impact on Bitcoin

  • The Federal Reserve released minutes of a meeting in December in which it decided to cut spending and raise interest rates.
  • This would cut the much-needed capital infusion on the market, and while stocks hit, Bitcoin could feel the most heat.

The US Federal Reserve is known to set the pace of global financial markets, and the latest move could have a significant impact on the future of the cryptocurrency market. The Fed recently released the minutes of a December meeting in which it decided to curb its spending and raise interest rates. This could significantly reduce the amount of capital in the stock market and equity, and even more so in the cryptocurrency market. Bitcoin has already felt the heat and is getting closer and closer to $ 40,000, and Ethereum and most of the major altcoins have also seen a red sea in the last two days.

Although the Fed convened its meeting in December last year, it did not issue the minutes of the meeting until two days ago. He has announced that he will start over $ 8 trillion in mortgage-backed bonds and securities he owns. According to the minutes, the process will begin this year, «perhaps in the coming months.»

According to the minutes:

Almost all participants agreed that it would probably be appropriate to initiate the balance sheet arrangement sometime after the first increase in the target range of the federal funds rate.

Analysts expect this process to begin in two months, beginning with the Fed’s benchmark interest rate hike in March. Worse still, the minutes state that «once the process has begun, the appropriate pace of withdrawal from the balance sheet is likely to be faster than during the previous normalization episode.»

Why the future of Bitcoin is in the hands of the Fed

The minutes were immediately published, the markets responded. The stock market hit hard, with Dow Jones Industrial Average showing its first fall of 2022. It was even worse for Nasdaq stocks, which suffered their biggest one-day loss since February last year at 3.34% .

The effect for cryptocurrencies has been increased. In the spectrum of risk assets, bonds are the least risky, followed by stocks and cryptocurrencies, which are considered the most risky of the three. Therefore, in the face of uncertainty, investors tend to sell riskier assets to their «safer» counterparts.

For example, when the Fed issued the minutes, Bitcoin was trading above $ 46,700. However, just after that, the most important cryptocurrency experienced a decline to $ 42,700, losing $ 4,000 in a few hours. It would continue to decline and, at press time, was trading at $ 41,540, down 3.9% on the last day alone.

This decline is likely to continue, at least in the short term, before Bitcoin separates from the broader financial markets. And according to Jay Hatfield, CEO of Capital Infrastructure Management, the nutrition shift could be the top risk of the year.

“If the Fed starts cutting the balance sheet, that will be disastrous,” he said.

According to him, investors do not want to be in the crypto stock or market «when the Fed is pushing liquidity away, it’s like being in Coca – Cola when Warren Buffett is selling his job.»

The only saving grace for Bitcoin – and this may be how the long-term advantage gives it – is that the direct impact of nutrition on the market is not as high as in other markets, such as bonds and stocks . Therefore, even when the Federal Reserve closes its positions, it will not take liquidity directly from the cryptocurrency market.

On the other hand, many institutional investors have become critical in the Bitcoin ecosystem. If the macroeconomic shocks caused by rising interest rates hit them hard, they could sell their BTC and other digital assets, putting pressure on their price.

Esdras Collins

Esdras Collins is an early investor in bitcoin and a veteran trader in the cryptocurrency and foreign exchange markets. He is fascinated by the complex possibilities of blockchain technology and is committed to making the subject accessible to all. His reports focus on the development of various cryptocurrency technologies.

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