How The Fed’s Actions Might Affect the Cryptocurrency

The bitcoin mood is getting a little dark. The regulator announced on 15th December that the economic stimulus program would be cut back.

Could this announcement lead to increased chances of another digital asset collapse and usher us into a more profound adjustment of the digital currency market?

Bitcoin Market Enters ‘Extreme Fear’

As the meeting on monetary policy by the Federal Reserve drew near, the consensus in the market was that the market was down. 

As the Federal Reserve planned to meet on Wednesday to decide on quantitative easing policies and interest rates, the Bitcoin market had dipped its toes in the “extreme fear” sphere. 

Bitcoin is trading at $48,000, which is significantly lower (30% lower) than its all-time November record of $69,000.

According to different sources, the Fear and Greed index analysis in the overall market attitude ranges from zero to one hundred. The market sentiment is fearful the more the index is closer to its lower bound.

The opposite is true concerning greed when individuals start buying assets from FOMO (Fear Of Missing Out). Currently, the metric is at 16, which indicates utmost fear. 

According to famous media houses, the general expectation from the Federal Reserve meeting is that there is a possibility that the central bank will aim to limit inflation by increasing the interest rates.

Financial markets should therefore be ready to switch their investment thesis. Nevertheless, the Federal Reserve has acted fast to avert consumer prices from escalating beyond its 2% mark. However, the move is expected to come into effect next year.

Currently, the market expectation for a quick rundown of asset purchases isn’t hypothetical.

By the end of the previous month, the Fed’s chair Jerome Powell indicated the federal reserve bank’s bond-purchasing initiative could end sooner than anticipated amidst the growing inflation rates and a more sturdy United States economy.

Powell further added that he and his associates would go over whether it would be ideal for closing our purchases a few months earlier than planned. 

Central Bank to Trim Down Bond Purchases

On Wednesday, Bitcoin bounced towards $49,000 following the announcement by the Federal Reserve to speed up the stimulus withdrawal process.

According to some analysts, the decision of the Federal Reserve was already included in the price, which means some traders had already done away with long positions, which in turn led to short-term buyers having attractive price levels.  

The Federal Reserve plans to decrease its bond purchases by $30 billion each month. This is twice as fast as the present withdrawal rate of $15 billion each month.

According to CoinDesk’s Brad Keoun, some bitcoin traders believe that the move will make bitcoin more appealing, making it an inflation hedge.

Currently, the prices of digital assets are stabilizing following their sell-off earlier in the month.

Over the past 24 hours, Bitcoin’s rise is at approximately 3%, compared to a 14% rise in the tokens for Solana SOL and a 4% rise in ether over the same time. 

According to Delphi Digital, a crypto research company featured in a Wednesday memo, the possible way forward is more sideways/choppy price action towards the end of the year. 

Even so, any volatility spike or prime risk-off event that penalizes risk assets would probably drag on BTC and the larger crypto market. 

Bitcoin Losses Bound to Accelerate

In the most recent correction, Bitcoin holders have encountered an acceleration in registered losses (cost decreases below their starting price basis). Negative returns can inspire selling in many instances as traders are terrified of more market declines. 

Glassnode, a crypto data firm, noted in a blog post that they’re currently noticing an acceleration of losses realized among holders of BTC, trending over 1 billion dollars daily on two instances in the course of this correction. 

The decline of BTC prices from a perpetual high of approximately $69,000 set off a more careful note in the market. According to Glassnode, the opening up of losses indicated the tension of another sell-off. 

Nevertheless, despite higher losses, blockchain data indicates that a few investors carry on withholding bitcoin.

For instance, BTC balance on exchanges has progressed in declining this year – which could signify that investors would instead hold bitcoin in their wallet than make it accessible on the exchange for sale. 

Bitcoin’s Selloff Driven by Options

The selloff weekend for Bitcoin and succeeding rebound show the volatility of the crypto market and its expanding relation to classes of traditional assets. 

Investors said that a few of the latest sell-offs resulted from liquidations on alternative exchanges.

It was also triggered by worries about Federal Reserve Policy, market risk, and interest rates, which have been behind many days of seesaw trade in stocks and other markets. 

As per Nicholas Cawley, a DailyFX analyst, there’s a link between high-risk and more active equities indices, such as the crypto market and the Nasdaq. The correlation wasn’t as strong some years back. 

Over the past two years, Bitcoin has gained popularity and become an extensively held investment.

A survey done by Grayscale investments stated that approximately 26% of investors in the U.S own crypto holdings.

The same study was done two years ago, and this time it didn’t focus on the number of respondents with bitcoin. Instead, the focal point was on the number of people willing to try out the idea. 

Investors have allocated 9 billion dollars to crypto funds this year.

From $18.8 billion in 2020, the assets under management for the funds have increased to $73 billion. 

Bitcoin Mood: So What Future Does Bitcoin Have? 

Even after the Fed meeting, crypto investors shouldn’t give up too soon. Bitcoin still has a future and better things are yet to come. 

Sure, there are many challenges cropping up at the moment, but there’s a possibility things will get better over time. 

How’s your bitcoin mood going? Discuss this and more in our telegram group.

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