Crypto rally meets headwinds as Fed roils markets

Crypto prices whipsawed throughout the week, rising ahead of the Fed, dropping after the 25 basis point increase and beginning to claw back losses afterward. 

The leading cryptocurrency by market cap, bitcoin, was trading around $27,600 by 10 a.m. ET, up about 0.4% over the past seven days, according to TradingView data. 

BTCUSD chart by TradingView

Ether slipped about 2.1% to about $1,750, while it was a mixed bag for altcoins. Binance’s BNB fell 4.2%, Polygon’s MATIC plunged 10% and Solana’s SOL was down 4%. 

Ripple’s XRP was buoyed by positive murmurings from its trial with the SEC and was up 17%. A verdict has not yet been reached in the ongoing case. 

Crypto stocks and structured products

Coinbase shares tumbled this week as the exchange received a Wells notice from the U.S. Securities and Exchange Commission. The firm’s staking products, Coinbase Earn and Coinbase Wallet, face investigations, as do asset listings. Shares in the exchange were down 3.8% over the week, according to TradingView data. 

On Thursday, Jack Dorsey’s Block became the latest target of short seller Hindenburg Research. In its first report since tackling India’s Adani Group, the firm said after a two-year investigation that Block has “systematically taken advantage of the demographics it claims to be helping.”

The payments company’s success has nothing to do with disruptive innovation, rather, it was the firm’s willingness to “facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as a revolutionary technology, and mislead investors with inflated metrics,” it claimed. Shares crashed about 20% directly after the report and are down 19% over the week.

It was a quiet week for MicroStrategy, adding 0.45%.

Macro matters

The Fed considered a pause in the days leading up to this week’s decision, but ultimately it chose to increase the Fed Funds target rate by 25 basis points.

source: federalreserve.gov and bls.gov

There’s a long way to go until inflation falls to the Fed 2% goal, and it’s going to be a bumpy ride. As such, the Federal Open Market Committee increased the target rate range to between 4.75% to 5% from 4.5 to 4.75% on Wednesday. Markets whipsawed during the news conference. 

Market volatility is three times higher during Chair Powell’s news conferences than those held by his predecessors, a recent report by the Centre for Economic Policy Research showed. His time in front of reporters also tends to reverse the market’s initial reaction.

“Rate hikes by the Fed have been a headwind for digital assets (such as bitcoin) as non-yield bearing assets look relatively less attractive, especially as inflation declines and real yields rise,” Chris Kuiper, director of research at Fidelity Digital Assets, told The Block. 

The drop in bitcoin following the announcement “may have been a similar reaction given the Fed’s posturing that higher rates may still be warranted,” he added. The narrative may be shifting, he noted, as investors appear to be pricing in rate cuts “sooner rather than later,” as evidenced by a decline in the two-year treasury yield — which typically leads or coincides with the Fed’s target rate. 

“We think that a shift to easier money and more liquidity will likely be a positive for digital assets in the longer term, and particularly bitcoin,” Kuiper concluded.

FedWatch

The market is now pricing in an 88% probability of a pause at the FOMC’s May meeting and a 54% probability of a cut by July. Powell emphasized a rate cut is not in the committee’s base case. 

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