Traders Wait for the Fed Decision as Bitcoin Pauses. Don't be Surprised if the Market Fluctuates

As traders awaited the Federal Reserve's interest rate decision on Wednesday, BitcoinBTCUSD +0.46% and other cryptocurrencies were on hold. The central bank's bad news could put a damper on Bitcoin's best January in a decade.

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A little more than 1% has been added to the price of Bitcoin over the past 24 hours, hovering around $23,000. Cryptos gained 40% to start the year as investors' appetite for risk improved, leading to a rise in the largest digital asset. Bitcoin remains just a third of its late-2021 high, but traders believe a brutal bear market is nearing an end - after the shocking bankruptcy of FTX in November - and that cryptos are poised to soar.

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According to Edward Moya, an analyst at broker Oanda, cryptocurrency fundamentals are playing second fiddle here, with risk appetite taking precedence. It's possible that Bitcoin could consolidate back towards $20,000 if the rally stalls after the Fed and mega-cap tech earnings fireworks."

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Meta Platforms (ticker: META) earnings Wednesday, along with peers Apple AAPL -0.82% (AAPL), Alphabet (GOOGLE), and Amazon.com (AMZN) earnings Thursday, will likely weigh on tech sentiment, impacting cryptos as well.

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There is a lot of attention focused on the Fed, however. With a macro backdrop that is unfavorable to risk-sensitive assets, inflation and rising interest rates have been key headwinds for Bitcoin over the past year. The worst may have passed for investors.

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A quarter percentage point rise in interest rates is expected from the Fed on Wednesday. After a spate of much larger rate hikes last year, this was another rate hike, but a marked slowdown in the pace of tightening financial conditions.

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For the Dow Jones Industrial Average and the S&P 500 to continue their recent rally, investors need to see Fed Chairman Jerome Powell signal an accommodative policy shift. 

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Expect a selloff if Powell appears aggressive. There could be pain involved.

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Bitcoin's price jumps appear to be largely a function of low liquidity and technical factors like a short squeeze, not organic demand, that drove prices up. Price rises could be accelerated by those same trends. Bitcoin could spiral downward if the Fed fails to meet investors' expectations.

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The majority of digital assets, other than Bitcoin, were on hold. It fell less than 1% to $1,575, the second-largest crypto. Cryptocurrencies that are smaller or altcoins performed better, including Cardano 2% up and PolygonMATICUSD –0.90% up. DogecoinDOGEUSD and Shiba Inu were both down about 1% after a recent, independent rally.