Bitcoin Declines, While Other Cryptocurrencies Exhibit Strength As The Fed Decision Is The Focus

After a rise that brought digital assets to their maximum height since last summer, BitcoinBTCUSD +0.17% and other cryptocurrency settled lower on Tuesday. The next major driver will be the Federal Reserve decision on Wednesday, although cryptocurrencies already exhibit underlying strength.

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The largest digital currency recently traded close to $28,500, its highest level because the crypto crisis intensified in June last year, but the price of Bitcoin has now dropped 2% over the last 24 hours to $27,750. After stalling earlier in March and dropping below $20,000, Bitcoin has resumed its upward trend, up about 70% this year to date and up for nine of the last ten days.

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"This halt will give Bitcoin time to 'cool off,' opening the door for another leg up. The first big line of defense is probably $26,000, and the second is probably $25,000, although the possibilities of a deeper correction remain high, according to analyst Alex Kuptsikevich at broker FxPro. "Before the Fed's decision, we should be ready for increasing market profit-taking."

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There are a plethora of explanations for why cryptocurrencies have performed so well in the last two weeks, one of which being the idea that the panic gripping the world's banks strengthens Bitcoin's guiding principles of economic decentralization. Expectations have most certainly changed as a result of constraints on banks, an unexpected result of the sharp increase in interest rates over the past year that has hurt both Bitcoin and equities equally.

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The possibility that the Fed would maintain interest rates unchanged or raise them by a quarter of a percent point on Wednesday is seen by traders as a sign of a more flexible monetary policy than the Fed's previous aggressive move. Given that lower rates increase interest in riskier assets like cryptocurrencies, signs that rate hikes may slow down or even stop this year would be very positive for Bitcoin prices.

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Despite this, Alex Thorn, the head of research at cryptocurrency-focused financial services company Galaxy Digital, stated that "further gains will be boosted or impaired by macro conditions... an investigation of achievement, on-chain, and supply-side statistics show reason for ongoing optimism for Bitcoin bulls."

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In spite of the fact that, on Wednesday, following the Fed decision, Bitcoin is likely to move along with the Dow Jones Industrial AverageDJIA +0.83% and S&P 500 SPX +1.02%, there are indications that cryptocurrencies are strengthening fundamentally as a whole, independent of macroeconomic considerations.

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For starters, according to Thorn, the correlation among Bitcoin and gold is rising while it is falling to its lowest point in years for the correlation to equities. This would be a hint that investors are starting to perceive digital assets as more of a statistically independent play than a reflection of risk sentiment, which could indicate that the asset class as a whole is maturing.

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Furthermore, data indicate that, as opposed to price movement influenced by the crypto futures market, the most recent increase is mostly based on accumulation by investors buying Bitcoin in the "spot market," or directly. These patterns point to the dominance of buy-and-hold traders rather than purely speculative price movements.

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However, in the short term at least, "I don't believe we are there quite yet," said James Lavish, general manager at the Bitcoin Opportunity Fund. "As much as certain Bitcoiners want to start believing that the financial meltdown has driven people forward into Bitcoin as a flight to security asset, I don't believe we are there quite yet." Despite the fact that it has been trading like a top risk-on asset for the previous two years, Bitcoin is still doing so today.

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Don't anticipate any movements this week to be influenced by anything other than the Fed decision as well as the outlook for interest rates, despite the fact that the trends mentioned by Bitcoin bulls actually indicate maturation and resilience across cryptos.

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The second-largest cryptocurrency behind Bitcoin, EtherETHUSD +3.77%, fell 3% to under $1,750. Smaller cryptocurrencies or altcoins displayed similar behavior, with Cardano down 3% and Polygon down 5%. DogecoinDOGEUSD +5.08% and Shiba Inu both had 4% price declines, putting Memecoins in the negative as well.