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Crypto mixed: How will the Fed's rate decision affect Bitcoin?

Published 12/12/2023, 12:20
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Investing.com - The cryptocurrency sector trades mixed on Tuesday, following the stock market tension in this week of central banks. bitcoin moves below $42,000 and Ethereum remains at $2,200.

Manuel Villegas, digital assets analyst at Julius Baer (SIX:BAER), analyses the main events in the US in relation to the digital assets market and, in particular, the world's largest cryptocurrency. "The year-to-date rally in Bitcoin remains steady, with the asset outperforming most of the market, especially on a risk-adjusted basis. Despite the series of upward implosions that characterised 2022 and the ensuing widespread scrutiny, Bitcoin has remained resilient amid an eventful 2023."

"A confluence of positive fundamentals has created the ideal conditions for the asset to rally, including US exchange-traded funds (ETF saga), long-term holder accumulation, speculation ahead of the halving next year and a growing conviction that America's fastest and steepest monetary tightening cycle has come to an end," Villegas adds.

"Cryptocurrency investors tend to favour the largest digital asset when global liquidity conditions deteriorate, as evidenced by changes in Bitcoin's dominance relative to cryptoasset market share. However, the behaviour of cryptoassets has been more in line with that of risk assets. Growing expectations of a rapid reversal of US monetary policy have had as fundamental an influence on US equity markets as they have on Bitcoin," warns the expert.

"Positive momentum in US net liquidity tends to be accompanied by improved sentiment about crypto markets. There is no doubt that rising interest rates have affected cryptoassets, as the technological development of cryptocurrencies has relied heavily on private investor capital," Villegas points out. "There is also no doubt that the attractive yields that lower-risk assets have been offering have increased opportunity costs towards riskier alternatives, as evidenced by the adoption of US Treasuries and the nearly $6 trillion now held in US money market funds," he adds.

"Lately, market positioning towards a more dovish US Federal Reserve in 2024 has triggered all sorts of speculation on risk assets. In our view, following the recent shift in market expectations towards a rapid reversal of US monetary policy, it seems unlikely that there will be any major surprises. While we share the view that US interest rates have peaked, we believe that the market has discounted a lot of good news of late, suggesting that prices may enter a consolidation phase before the focus returns to the impending ETF launch," concludes Villegas.

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Translated from Spanish using DeepL

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