An analysis of a trade publication maintains that the most important cryptocurrency is not behaving like “digital gold”. And that their reaction when US monetary policy tightens will indicate their real place in the financial market.
An imminent change in the tone of monetary policy in the United States and other developed countries promises to test financial markets in general, and the still-fledgling crypto market in particular. According to an analysis by the economics and finance journal Barron’s, the arrival of the tightening of global monetary conditions will be the ultimate test for Bitcoin and other crypto assets, which will decide whether it is speculative assets that follow the market in its falls or value shelters such as gold that allow hedging against bear markets.
Today and tomorrow the open market committee of the Federal Reserve (FOMC) meets the body that decides the course of the United States’ monetary policy, the level of rates, and the initiatives to buy back assets to manage market liquidity. With inflation at four-decade highs, the result of the lax policies used around the world to try to mitigate the economic impact of the pandemic, the question is not whether the Fed is going to tighten its monetary policy but when it is going to do so. . And how fast.
The Fed meeting is not the only one of the week. The Bank of England, the European Central Bank, and even the Bank of Japan this week have different communications to give the market about the future of their money markets. And that goes back to this week, and tomorrow in particular, on a “D-day” for crypto.
“The most speculative assets were affected on Monday before a series of meetings of the central banks, as the markets began to consider a world of tighter monetary policy,” analyzed the article that carries the signature of Callum Keown.
Bitcoin was included in this, falling below $ 47,000, more than 30% below its all-time high reached last month. Retailer favorite GameStop plummeted 14% and fellow Reddit star AMC Entertainment Holdings plummeted 15%. Both stocks were set to suffer further losses early Tuesday, as Bitcoin leveled off, ”the analysis continued.
According to Keown, the lack of track record of Bitcoin’s buying as central banks withdraw liquidity from the market, raise rates, and tighten their monetary policies, in general, makes it difficult to predict what the outcome will be.
When it comes to the performance of cryptocurrencies during a tightening cycle, there isn’t much recent history to build on. The last time the Federal Reserve embarked on a path of tightening monetary policy, after a period of easing, in 2015, the price of Bitcoin was USD 465, or about a hundredth of its current price, “he said.
Bitcoin, among the different cryptocurrencies, has proven to be very little use as a payment currency due to the difficulty of its protocol and the high transaction costs. But with its cap on the maximum amount that can be issued, its proponents see it as a possible substitute for gold. That is a store of value. Or a haven asset.
In the face of poor results on Wall Street on Monday, for example, gold rose for the second round in a row as investors sold risky assets such as stocks to take refuge in the precious metal. If Bitcoin behaves differently, it is more of a speculative asset than a haven.
“ Bitcoin hasn’t acted like digital gold of late, most recently when the asset fell sharply along with stocks after Thanksgiving, when the omicron variant of the coronavirus spooked markets and Jerome Powell turned hawk. Keown argued.
“The asset does not appear to be a haven for investors in times of risk if that is what is ahead if the Fed becomes more. in favor of tightening monetary policy). In turn, if there is a correlation and global central banks are less hawkish than expected this week, Bitcoin could have a rebound, “he added.
“ Bitcoin’s place within the financial markets is not defined yet, but how it reacts in the coming days will probably tell us much more. However, looking for correlations and trends in cryptocurrencies can quickly become a thankless task. The rise of 20% of Dogecoin on Tuesday, when the CEO of Tesla, Elon Musk, said that the company would allow buying some products with this asset, is an example of this, “Keown analyzed.