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Bitcoin crashed, together with other cryptos, on news that rate hikes may come sooner than expected.
The crypto fear and greed index tipped to extreme fear as the oldest crypto dropped below $43,000. Other cryptos followed, with Ethereum dropping 12%, to $3,300.
Most other major cryptos also posted losses in the double digits. Binance coin dropped to $460, down 10%. Solana dipped almost 13%, below $150, while Cardano dropped to $1.21, almost 10%.
In total, the crash wiped out $200 billion in crypto, as the global crypto market cap fell to $2.04 trillion.
The crash came after the release of the minutes from the Federal Reserve’s December meeting. The Open Market Committee (FOMC), a body in charge of U.S. monetary policy, seems committed to raising interest rates.
Another issue was the mining halt in Kazahstan. The second-largest Bitcoin mining country is experiencing political unrest. This prompted the government to shut down the internet, forcing miners out of operation. This led to the BTC network hashrate dropping to 165 EH/s, from 200 EH/s at the start of the year.
Crypto markets had just recovered from a similar crash in early December. Bitcoin dipped to a low of $43,000 before settling to $47,000. The December drop came after President Biden renominated Jerome Powell as the Fed Chairman. Most traders saw his renomination as a sign that interest rates are going up.
Fed Rate Hikes
Inflation has reached record levels since the Fed’s unleashed its huge pandemic stimulus. Now, the economy is recovering, which may create more problems. Growing demand for consumer and producer goods is making inflation even worse.
That’s why consumer inflation hit a 40-year high in November or 6.8%. Producer inflation, on the other hand, rose by the fastest pace ever, almost 10%.
The Federal Reserve has a dual mandate – to maintain both inflation and employment levels. As the economy is recovering, it may soon reach full employment in the U.S. That leaves the Fed to deal with inflation.
To do that, the Fed will probably have to raise interest rates. The Fed minutes revealed that most FOMC members think that rates will have to go up soon.
Why Rate Hikes Hurt Crypto
Any mention of interest rate hikes has a negative effect on crypto. Many traders consider cryptos a hedge against inflation. That is because most major cryptos have a limited supply, which makes them scarce.
However, if interest rates rise, inflationary pressures may be lower. That, in turn, makes inflation hedges less appealing to investors. In fact, gold – the oldest inflation hedge, dropped after the release of the Fed minutes.
Others see crypto as a risk play, similar to tech stocks. That’s because crypto relies on new tech, which requires a great deal of upfront investment. On the flip side, just like with tech stocks, the potential gains are huge.
However, higher interest rates hurt tech stocks as well. Higher interest rates mean a higher cost of lending. That means that investors won’t take on as much risk as before. This obviously hurts crypto.
However, not all traders believe that the Fed will actually raise interest rates. For example, Nexo founder Antoni Trenchev believes that the Fed doesn’t have the political will to keep rates high.
Interest rate hikes will negatively affect stock valuations. They may even cause a stock market crash. That’s why some traders believe that, when the going gets tough, the Fed will quickly reverse course. In that case, crypto and gold are likely to perform very well.