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Bitcoin, Ethereum Spike Despite Fed Rate Hike

As expected, massive inflation prompted the Fed to turn hawkish on inflation.

On Wednesday, the Federal Reserve stated that it would speed up the removal of monetary policy support. This includes tapering its $90 billion monthly bond purchases and hiking interest rates. Interest rates are currently at historic lows of 0.25%.

What influenced the decision is likely the steep rise in inflation numbers. November CPI, a measure of consumer prices, rose 6.8% compared to the same period last year. Moreover, wholesale prices, producers pay for their inputs, rose a whopping 9.6%.

Fed Chairman Jerome Powell and Fed officials had to acknowledge the fact.

The inflation that we got was not at all the inflation we were looking for.

These numbers meant that consumer prices rose at the fastest pace in 40 years. On the other hand, wholesale prices rose at a record pace, the highest recorded history.

Moreover, with inflation as high as it is, Fed members are upping their rate hike forecasts. December’s economic forecast showed that 12 Federal Open Market Committee members expect three rate hikes in 2022. Conversely, half of the Fed members predicted just one rate hike next year in September’s forecast.

Chairman Powell echoed those concerns.

With inflation as high as it is, we have to make policy in real-time.

Bitcoin, Ethereum Up

Despite what some might have expected, mosts major cryptos were up on the news. Bitcoin was up from $46,000, breaking $49,000. However, it did not go past $50,000. Ethereum, the second-largest crypto, rose even more sharply, from 3,680 to $4,000.

Most smaller cryptos rose as well, repeating the same pattern. Binance Coin rose from $505 to $545, and Ripple rose from $0.78 to $0.83. Like Ethereum and Bitcoin, they experienced a steep jump and stabilized at a new level.

On the other hand, Solana rose from $158 to $179. However, it then continued to grow to $185. As a result, the “Ethereum Killer” recorded over $5.5 billion inflows to its market cap.

Most traders and institutional investors consider Bitcoin and other cryptos speculative, risk assets. Therefore, they treat crypto similarly to other risk assets like tech stocks. In particular, traders like to hold these assets when low-interest rates. This is because low-interest rates reduce the risks associated with borrowing. They also make potentially high returns of these assets more enticing to investors.

Both tech stocks and crypto reacted very positively to the Fed’s stimulus, including near-zero interest rates. But, conversely, a hike in interest rates is likely to harm crypto. That is, as long as most investors think of crypto as a risk asset.

Rate Hike Priced In

However, markets already priced in the Fed’s rate hike. In early December, Bitcoin crashed from $57,000 to as low as $46,000. Consequently, most significant cryptos followed, with the crypto market cap losing about $300 billion in market cap. Bitcoin is now 25% below its all-time high of $68,991.

As most traders already expected the decision, it did not push crypto down. Instead, the decision removed a significant risk factor for essential cryptos. Now, markets may get some relief. Bitcoin whales may already be gearing for another pump.

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