Crypto investors around the globe had glued their eyes to the Federal Reserve meeting held on 15th December 2021.
Ever since the beginning of tapering the QE process that had started back in March 2020 in response to the COVID 19 pandemic and subsequent economic halt, assumptions were already made. Feeding life to these assumptions, the decision by FED is believed to be one of the crucial events impacting the US economy, and therefore, the whole world.
While this might bring some tremors in the market, it is only wiser to introspect your investment moves beforehand. But before getting to how you can do this, let’s understand what’s happening –
When the coronavirus pandemic hit the US economy, the Fed slashed interest rate and ramped quantitative easing/QE to stimulate the economy. The intent was to boost the economy by providing liquidity and encouraging borrowing by making it cheaper. QE is a tool central banks use to provide liquidity to the financial market and keep the money moving.
By March of 2021, the unemployment rate went down by 6%, and inflation rose by 2%; this was seen as thawing the economic freeze by the Fed, resulting in the decision to end the QE program. The idea was, as the economy recovers, the Federal Reserve stops buying the bond assets, and the interest rate reinstates to its original level.
How does it affect you?
Federal Reserve is a giant buyer, and when it starts reducing its asset purchase capacity, the price of bonds tends to fall. This ultimately results in pushing up the interest rates eventually helping the economy and curbing inflation from rising to unhealthy levels.
Of course, the Fed does not immediately stop buying assets, but it gradually pulls off. This process is called tapering. It is a part of the recovery.
For a crypto investor, a faster increase in interest rate might result in significant market volatility. The market hasn’t responded largely to the decision yet; we witnessed a spike in major cryptocurrencies like Bitcoin, Ethereum, Solana, and Doge.
Bitcoin shot up approximately by 4% i.e from $47,800 to more than $49,000. Ethereum went up by 6.11%, from $3810 to $3985. And Solana increased by 15.64%.
The reactions from big crypto investors and entrepreneurs over the decision have been a mixed bag. With all things being said, volatility is foreseen, and you should be prepared for it as an investor.
Let’s take a quick look at what the thought leaders of the Crypto world have to say about this –
Jesse Cohen, the Senior Analyst at investing.com, says,
“With the Federal Reserve expected to accelerate the speed at which it tapers its bond-buying program and signal faster rate hikes next year, crypto prices are likely to suffer further turmoil; in the months ahead.”
Another interesting comment from Cohen outlined that a higher interest rate might cause an aggressive sector rotation causing investors to dump risky assets like Crypto for relatively safer alternatives like stocks.
While some comments were briefly critical, there were a few that indicated contrary anticipations. Some analysts expressed that the decision of the Fed may not disturb the major cryptocurrencies. According to Matt Blom, global head of sales and trading at crypto exchange Eqonex, if the Fed delays the pace of taper, Bitcoin is likely to enjoy a fast recovery.
Louise LaValle of Grayscale said,
“As bitcoin and the crypto market continues to mature and institutionalize, Fed regimes and macro events can have a greater impact on near term price discovery,”
Conclusion
Fed Decision did not disturb the market at scale and perhaps just made it a little aggressive. The news buoyed the crypto market, with total market capitalization jumping by $140 Billion in the last 24 hours. However, the market is anticipating a stifle between Wall Street and the crypto army with the tapering. Only time will tell who gets the HODL and BUIDL.