Notes 5/4: Bitcoin Price’s Premature Celebration After Fed Meeting

The Federal Open Markets Committee (FOMC) decided to hike interest rates by another 25 basis points yesterday, bumping up its lending rate to between 5 and 5.25 basis points.

In his press conference discussing the move, Fed Chairman Jerome Powell did not provide concrete future guidance. Which is to say, he held off on committed course of action. It is not clear whether the agency plans to continue rate hikes in the future or take a breather. Powell said that decision would be subject to an “ongoing assessment” of economic data.

That’s not very helpful.

The raft of economic data available currently is mixed. While inflation remains persistent, labor markets are cooling. The country’s gross domestic product (GDP) slowed last quarter; a lingering effect of depressed inventory due to supply chain problems. Meanwhile, the rapidly unfolding banking crisis threatens to morph into a credit crunch and adds to the difficulty of gleaning hints about possible future policy from economic data.

Bitcoin Price Haven

Bitcoin price fell slightly after the Fed’s announcement. It reversed course this morning and almost touched the $29,500 mark this morning before retreating. The biggest cryptocurrency by market capitalization is changing hands for $28,891.60, an increase of 2% from a day earlier, as of this writing.

Since last year, when the Fed indicated a tightening of economic conditions, bitcoin price has moved in lockstep with the agency’s pronouncements. A restrictive economic policy lessens the appeal of risky assets, like bitcoin, that promise juicy returns in short timeframes. In that sense, Fed Chair Jerome Powell’s non-committal responses yesterday about future policy proved enough for the cryptocurrency’s proponents to push its price upwards.

A Credit Crunch In The Making

But their celebration may be a premature one. Chair Powell did not discount the possibility of an impending credit crunch due to the banking crises. “The economy is likely to face headwinds in response to tighter credit conditions,” he told reporters, adding that less credit will weigh on economic activity and inflation. The keyword here is ‘likely’ because it means that the agency anticipates rough weather ahead.

The flow of credit in an economy is an important metric for a risk-laden asset like bitcoin. The cryptocurrency’s price thrived and set records in the easy money years of the last decade. A Zero Interest Rate Policy (ZIRP) enabled risk-taking, and capital flowed into new corners of the economy, including cryptocurrency markets.     

Credit is harder to come by nowadays even as debt rises to record levels. The action in equity markets, where stocks of regional banks are being hammered this morning, shows that the worse in the banking crisis is not yet behind us. More bank failures will result in less credit being dispensed and harm bitcoin’s already low liquidity levels.

Even a pause in interest rate hikes is detrimental to bitcoin price because it translates to a period of sustained high rates. That will stanch investor appetite for risk and bleed more liquidity from bitcoin’s ecosystem. This, of course, is besides the fact that bitcoin trading itself suffers from fundamental flaws, such as trades against unregulated stablecoins like Tether and illiquid tokens like TrueUSD (TUSD).  

Restricting the token’s supply by manipulating its algorithmic difficulty can mitigate the effects only so much. Eventually, impatient traders eager for profits take over. And the opportunity to make those don’t look too good right now.

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