How the most recent Fed decision may impact cryptocurrency pricing

Prior to the Federal Reserve's newest policy statement on Wednesday, Bitcoin and Ether are in an intriguing configuration, and Bernstein is intently observing the effects of the next rate hike (or lack thereof) on cryptocurrency values.

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Around 2:00 p.m., the Fed will wrap up its two-day conference and announce its most recent policy choice. ET. The majority of the market anticipates another 25 basis point increase in interest rates from the central bank. Some people predict there won't be a hike.

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According to Coin Metrics, Bitcoin has increased by 22% this month and by more than 70% overall. Bitcoin is behaving more and more like it did in "the pre-2020 days of Crypto, where it traded as a'safe haven' and 'risk-off' asset," Bernstein analysts Gautam Chhugani and Manas Agrawal wrote in a note on Wednesday. This is due to the 2023 rally and a latest break in its correlation to stocks, which is lower compared to its performance over the past two years.

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In the event of any weakness with the banking and financial industry, they continued, "We view cryptocurrency closer to its non-sovereign, decentralized beginnings as a safe-haven asset." Recent correlation statistics have begun to provide some support for the mental model in question.

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Inflation and Fed rate increases continue to be the key drivers of bitcoin. Here are three possibilities that Chhugani and Agrawal are keeping an eye on and how prices may respond, according to investors.

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1. The Fed increases rates by an additional 25 basis points.

"Crypto does sell off in this scenario (small profit booking given strong recent few weeks), but not by much," they claimed. This is because such a move worsens the financial system.

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"A weakened banking sector, which will eventually require a large-scale involvement by the Fed, is bullish for cryptocurrencies since it strengthens the case for 1. a decentralized "store of value" currency (both BTC and ETH) that cannot be depreciated by a central bank and 2. a case for decentralized banking markets that can be open, quick, and reliable in this fast, global digital age of banking crises and allows people to keep control of their money through self-custody," they noted.

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2. The Fed stops raising rates, "perhaps temporarily."

The analysts referred to this possibility as a "double-edged sword" because, while it would cause investors to worry about the severity of the financial problem, they might also see it as a temporary measure that would promote greater bank stability before the Fed begins its fight against inflation.

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According to Chhugani and Agrawal, there "may be an initial good impulse again for crypto markets, but markets would absolutely wait to see what else is to come out of the financial crisis."

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3. The Fed scales back rate increases by 25 or 50 basis points

The analysts deemed this scenario implausible, pointing out that while stabilizing the banks would be "the correct thing to do," it would also alter public perception of the fight against inflation.

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They stated that the cryptocurrency markets "may soar on the important risk impulse, and it may validate some who have been suggesting the Fed reversed course, after busting the banks." "But, if crypto just pivots to a risk on trade, any near-term crypto rise will find it difficult to sustain growth."

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We hold a different perspective on this and believe that risk-on favorable interest rate situations are bad for cryptocurrencies because they encourage more gambling and illicit use cases.