Bitcoin Price Drops to $25K as Fed Signals Additional Hikes

It has been a tough outing for both crypto and traditional assets for most of 2022 – against a backdrop of the energy crisis, broader economic instability, and the prospects of a global recession, most assets saw their valuations dwindle by high double digits. 

The most pressing driver for the negative market performance has been the growing interest rates, which the central banks around the world have been using as the main weapon to fight the multi-decade high inflation.

Despite the central banks’ monetary hawkishness, both traditional and crypto assets have started this year on a bullish note, which leads many investors to believe the economy could shake off the woes of high inflation without a prolonged recession in 2023. 

Fed pauses rate hikes for now, signals that two more small hikes are coming in 2023

During the June 14th FOMC meeting, the Federal Reserve officials decided to keep interest rates unchanged but indicated that they may need to rise by up to half a percentage point by the end of the year. The decision comes in response to a stronger-than-expected economy and a slower decline in inflation. 

Despite concerns about inflation, Fed Chair Jerome Powell stated that the US growth and job market have held up better than expected, allowing the Fed to proceed with less economic damage. The pause in rate hikes is meant to allow the Fed to gather more information before determining if further increases are necessary. 

According to CME’s FedWatch tool, investors believe we will see another 25 bps bump by the end of the year, most likely in July. Source

The focus is now on finding the right balance between slowing price increases and minimizing unemployment. The Fed’s latest projections show a higher interest rate outlook for the year, with some officials suggesting rates need to go even higher, possibly with two more 25 bps hikes. However, Powell expressed optimism that the conditions needed to bring down inflation are starting to fall into place, including below-trend growth, a slightly weaker labor market, and improving supply chains. 

The overall message was cautiously optimistic, aiming to keep options open for potential rate increases while acknowledging the possibility of declining inflation. Market participants anticipate only one quarter-percentage-point increase by the end of the year, with a slight increase in the chances of a rate hike next month.

Following the rate hike, Bitcoin’s price dropped from $25,850 to below $24,800 but has since stabilized in the $25,000 range.

How have Fed rate hikes affected Bitcoin and other cryptos?

The growing interest rates enacted by the Fed have contributed to a very poor performance of Bitcoin and other cryptocurrencies in the past year. BTC/USDT is trading over 60% removed from its 2021 all-time high, while coins like XRP, Cardano, and Solana are showing even more extreme losses.

Here’s an overview of the 2021, 2022, and 2023 Fed rate changes and the price of Bitcoin at the time they were enacted:

The takeaway here is simple – ever since the restrictive monetary policies have been put into place, crypto markets have been hurting. In addition to crypto, other expansionary assets, such as tech stock, have also seen a massive decrease in their value. Case in point, the S&P 500 Index, which is broadly used as a general measure of the US economy, has lost in excess of 20% since the beginning of 2022.

How have interest hikes affected the inflation rate

The main reason why the Fed and other central banks are raising interest rates is to fight inflation and protect their local currencies from losing value. It is with noting that the US and most Western economies’ goal is to bring inflation down to 2%. In the table below, you can check the inflation figures for the United States, ordered by month.

A look at past interest rate hikes

Here’s a complete timeline of Federal Reserve interest rate hikes and other developments on the interest rate front, primarily focused on financial news from the Western hemisphere. The events are listed in reverse chronological order, from the most recent to the oldest one. 

May 3, 2023 – Fed enacts 10th consecutive interest rate hike, raises rates by another 25 bps

During May’s meeting, the US central bank increased interest rates for the tenth consecutive time, bringing the federal target rate to 5.00 – 5.25%. The Fed decided to go forth with another bump in interest rates despite the drop in Consumer Price Index (CPI) in May, which decreased from 4.9% in April 2023 to 4.0% in May.

The Federal Reserve maintains its position of bringing the inflation percentage down to 2% and has made it clear that it will keep interest rates high for as long as that inflation goal is achieved. Many investors are doubtful about the Fed’s resolve, believing that the central bank might release its grip on monetary flow due to the negative effects on the banking system.

March 22, 2023 – Fed pauses rate hikes for now, signals that two more small hikes are coming in 2023

The last FOMC meeting saw the US central bank raise rates by another 25 basis points, bringing the interest rate to a new high of 4.75 – 5.00%. The increase was largely expected as more than 87% of investors anticipated a 25 bps hike, according to the CME FedWatch Tool.

Most investors anticipated a 25 bps hike, according to the CME FedWatch Tool.

What could be coming as a surprise, however, was Fed chair Jerome Powell’s statements that the rate hikes could be soon coming to an end, despite the elevated levels of inflation. Powell again said that the Fed maintains its target of bringing inflation down to 2% and that it will be a long and bumpy ride.

Powell also touched upon the recent issue in the banking industry, saying, “The U.S. banking system is sound and resilient.” However, many experts believe that the reason why Fed is thinking about relaxing its monetary policy is exactly the fear of how banks could respond to higher interest rates.

Meanwhile, Bitcoin saw a dip in value following the latest hike, dropping from $28,500 to $26,700. It has since rebounded to $27,600. In addition, both the S&P 500 and Nasdaq dropped in value, losing -1.65% and -1.37% in the last 24 hours, respectively.

February 1, 2023 – Fed chair acknowledges “the disinflation process has started” as investors meet another 25 bps hike with a bullish response

On Wednesday, the Federal Reserve held its first FOMC meeting of 2023. To the surprise of virtually no one, the US central bank officially decided to lift the interest rate hike by 25 basis points, bringing the benchmark rate to a range between 4.50% and 4.75%.

Despite the eight restrictive monetary measures in a row, investors welcomed the address of Fed chairman Jerome Powell with optimism, primarily due to his comments about “the disinflation process” having started. This means that the economy is much more likely to make a soft landing and avoid a prolonged recession that was feared when the first round of rate hikes started in early 2022.

The S&P 500 gained over 100 points (+1.25%) on the news, while other major indices also showed bullish performance. 

The cryptocurrency market, which has grown increasingly tethered to the performance of the stock market over the past couple of years, has also seen a considerable move to the top, growing by over +4.6% to $1.11 trillion in the last 24 hours.

Bitcoin price jumped roughly +4.1% to $24,244 after Fed’s address, its highest point in over six months.

December 14, 2022 – Fed Chair calls investors “frantic” as Bitcoin price and U.S. equities take a dive

The seventh consecutive interest rate hike has eliminated the short-lived enthusiasm that investors experienced upon encouraging CPI results published earlier in the week, which showed that inflation rose 6% year-over-year, 0.1% less than experts expected.

However, somewhat positive inflation data was not enough to deter the Fed from enacting another interest rate hike. The seventh consecutive rate hike increased the federal rate by 50 basis points, bringing the interest rate to 4.25 – 4.50%

In a speech on Wednesday, Fed Chair Jerome Powell again said that the hawkish monetary policy would persist throughout next year, so investors shouldn’t expect any rate cuts in 2023. He also predicted that people would be “bolting from stocks” and called such actions to be “too frantic”.

Powell’s remarks turned out to be true, as leading market indices such as the Dow Jones, S&P 500, and Nasdaq Composite Index all lost about 2%. Bitcoin and other crypto assets followed suit, losing most of their weekly gains as a result. At press time, BTC/USD was trading at $16,980.

According to Mike Mcglone, who works as a Bloomberg senior analyst, the market situation today resembles that of “the stock market bubble of 1929.”

“Some 1929-Like Forces at Work in 2022 – The 2021 pump in US liquidity can be compared with the stock-market bubble of 1929, with implications for similar outcomes.”

November 2, 2022 – Bitcoin price doesn’t budge after 4th consecutive 0.75% Fed rate hike

Following the Federal Open Market Committee (FOMC) meeting on November 2, the U.S. Federal Reserve (Fed) announced the fourth consecutive 75 basis points (BPS) interest rate increase, which brought the Fed rate to 3.75 – 4%. The decision came as a bit of a surprise as many experts predicted that the next interest rate hike would be smaller than the three previous ones.

The price of Bitcoin has remained stable following the latest Fed’s rate hike announcement – Bitcoin’s price stayed in a week-long rangebound channel between $20,000 and $20,900 despite the rising interest rates. 

After the Fed meeting, crypto assets other than BTC also haven’t shown much movement in either direction. Ethereum recorded the largest price fluctuation out of all top market-cap cryptos, having fallen from $1,620 to $1,510 following the address of Jerome Powell, who serves as the 16th chair of the Fed. Since falling to its local bottom, ETH price recovered to $1,560 later in the day.

October 27, 2022 – The ECB follows its US counterparts, enacts third consecutive 75 BPS rate hike

The European Central Bank (ECB) has announced a third consecutive rate hike in the fight against the record inflation in the eurozone, which reached 9.9% in September. ECB President Christine Legardge said that the 19-country monetary union could plunge into recession if “inflation remains far too high.”

September 21, 2022 – The Fed rejects 100 BPS rate hike, opts for another 0.75% increase instead

Following bad labor market and CPI data, many investors were predicting the Fed would resort to a full percentage point increase in the fight against inflation. In the end, central bankers convening at the FOMC meeting opted for the third consecutive 75 BPS hike instead. The digital currency market greeted the decision with a bearish response, with Bitcoin falling below $19,000 on September 21.

July 27, 2022 – 75 BPS rate hike enacted to combat the largest yearly increase in the CPI since the 1980s

During the fifth FOMC meeting of 2022, the Federal Reserve officials decided that another 0.75% interest rate increase is necessary to combat the growing inflation. According to data from the Bureau of Labor Statistics, the CPI increased to 9.1% in June 2022, the largest yearly increase in the CPI since the 1980s. After the conference of members of the FOMC, the crypto market cap dropped beneath $900 billion, hitting its lowest value since early 2021.

June 16, 2022 – Record 75 BPS rate hike enacted following the FOMC meeting  

After smaller rate hikes in March and May failed to reign in the growing inflation, the Fed resorted to a 0.75 percentage point increase in the Federal Funds rate since the 1980s. The price of Bitcoin fell to $22,700 after the announcement. Bitcoin lost nearly half of its value since the first Fed rate hike in years was enacted in March 2022. Similarly to BTC, since the first rate hike by the Fed, the crypto market cap nearly halved in value.

May 5, 2022 – The Fed enacts the sharpest interest rate increase since 2000 

The U.S. Federal Reserve announced the sharpest interest rate increase since 2000, raising the Federal Funds rate to 0.75 – 1.00%. Fed Chair Jerome Powell said that the central bank is moving “expeditiously” to reign in the growing Consumer Price Index (CPI), which recorded an 8.5% year-over-year increase in March 2022.

March 17, 2022 – The Fed puts an end to zero interest rate policy with a 25 BPS hike

After a period of zero interest rate environment designed to boost the economy hurting from Covid-related lockdowns, the Federal Reserve announced it would be raising rates to 0.25 – 0.50% on March 17. Following the trend-setting monetary decision by the Fed, Bitcoin rallied from $40,900 to almost $45,000 within a week.

How does raising interest rates help inflation?

In simple terms, inflation arises when the supply of money is growing, which, in effect, devalues each unit of money. Interest rates make borrowing and the creation of money more expensive, which decreases the supply of money over time. 

Is Bitcoin an inflation hedge?

The debate over Bitcoin being an inflation hedge is as old as the cryptocurrency itself. The artificially capped supply of 21,000,000 coins should, in theory, make Bitcoin less susceptible to inflation. However, many argue that for Bitcoin to become a true safe haven asset, its adoption among both institutional and retail users should considerably increase. Until then, Bitcoin remains subject to external market forces, similar to other expansionary assets.