Bitcoin, the poster child of decentralization, is always on the radar of centralized institutions. Despite its decentralized nature, BTC price movements are affected by regulatory changes, affecting the Altcoins that are heavily dependent on Bitcoin. Clarity in regulatory news can often increase people’s willingness to use and invest in cryptocurrencies. However, uncertainties or stricter regulations can encourage them to unload investments and force the market into erratic turns. Regulatory impact is always on the minds of market participants, which is why breaking it down into its core components is crucial for understanding the overall market sentiment.
Recently, The Federal Reserve retained interest rates securely within their current span of 5.25-5.5% but updated its outlook for reductions to merely one trim in the second quarter of 2024. Fed Chair Jerome Powell addressed at a press meeting that the financial institution still needs to feel more confident to decrease rates, even as inflation has softened from its peak levels. Members of the central bank’s policy-making body noted there had been “modest” additional advancement towards attaining their target of two percent inflation. Let’s examine how the FED’s rate decision can impact the market.
Why can the FOMC decision impact financial markets?
The Federal Open Market Committee plays a role in the United States financial markets. The decisions made by the FOMC, such as changing interest rates or implementing easing measures, shape the overall economic landscape, where banks, investment firms, and other financial institutions operate based on the policies set by the FOMC. As a result, these policies impact various financial sectors, like stocks, bonds, and cryptocurrencies, influencing how investors strategize and market trends unfold.
Liquidations in the Crypto market
In the two days, the cryptocurrency markets have had significant ups and downs, leading to forced sales of almost $400 million. Bitcoin reached a peak of $70,000 on Tuesday. Then, a sharp drop was experienced to $67,330.33, following indications from the Federal Reserve about potential interest rate increases. The value of Ethereum dropped by $400 to $3,495.07 as of June 13th. Even though the May Consumer Price Index (CPI) report was a bit lower than expected at 3.3% year over year, of the predicted 3.4%, it briefly boosted optimism in the crypto market. However, confidence quickly faded as prices returned to their mid-week levels.
Crypto assets remain hostage to uncertainty, their volatility exacerbated by destabilizing flash crashes triggered by cascading liquidations during times of fragility. Illiquidity runs rife when turmoil takes hold, sharpening slides and deepening dissolution as forced selling spreads like contagion. This could be due to the fear of less stimulus or higher borrowing costs in the future, which could prompt a selloff in speculative assets like cryptocurrencies – to mitigate potential losses or, if the holders are flush, to lock in gains.
Further, cryptocurrencies are generally considered higher-risk investments due to their price establishments and regulatory restrictions. Suppose investors are presented with riskier, broader market conditions or a reduced economic stimulus opportunity. In that case, they may exit the market by liquefying their holdings to earn a safer annual percentage yield (APY). However, the possibility of cryptocurrency acceptance continues to be robust. This decision reflects temporary market trends shaped by economic indicators and investor sentiment.
What does this mean for the crypto market?
To maintain economic stability and prevent an inflationary spike, The U.S. Federal Reserve has decided to keep interest rates unchanged and signal only one rate change this year. The currency market is constantly changing, and the continued performance of the financial environment could lead to a surge in the overall adoption of cryptocurrencies. With interest rates at their lowest, banks would be compelled to pay out the funds at the lowest profits.
The unchanged interest rate, in turn, shifts focus for potential investors considering cryptocurrency to maintain their interest rate return and as a hedge against inflation, with some looking towards digital assets such as Bitcoin, Ethereum, and others. Therefore, traditional methods of generating returns are likely to stagnate, and the high-return promise of cryptocurrencies could become increasingly popular as they attract more capital, potentially increasing market activity and volatility.
The Federal Open Market Committee’s recent policy update revealed a 0.25 percentage point reduction in the benchmark interest rate before year-end, contrasting with expectations from the March policy statement. This dovish shift may be temporary, as deteriorating economic conditions could prompt the central bank to pivot towards additional policy revisions.
The announcement signals the FOMC’s desire to balance curbing inflationary pressures with fostering recovery, avoiding overheating while supporting growth. The tempered approach to easing could make cryptocurrencies more attractive for investors seeking higher returns and inflation protection.
However, if the economic situation worsens, the FOMC may decide to implement rate cuts beyond what they currently have in mind. This could result in increased market volatility as investors respond to shifting conditions. When interest rates are lowered, investors often look for returns, which can lead them to move their investments from traditional, safe assets to riskier ones.
Gold, a traditional safe haven, might have increased investment to hedge against economic uncertainty. On the other hand, cryptocurrencies could attract more investors seeking significant returns. This could lead to increased market activity and rampant price fluctuations in the crypto market. While cryptocurrency market activity would rise, the volatility risk would also spike. Investors would need to resort to short-term investments rather than long-term ones.