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Market Insights

Bitcoin's lost: will the Fed point the way?

Bitcoin breaking

Bitcoin’s going nowhere fast so far this year. Stuck in a range between ~$33,000 to ~$48,000 at the extremes, yet coiling in an even tighter range recently. The upside has been capped by the 20 day moving average and support is found at the $37,500 zone. Bitcoin seems to have run out of catalysts…


Could tonight’s Fed meeting push Bitcoin into choosing a direction?

Trend followers will hope the answer is yes, but there’s a lot going on at this meeting. Some are expecting a ‘dovish’ hike, where the Fed could hike by 0.5% but dial back the hawkishness and perhaps start to focus more on the risks to growth.

The implication being that interest rates wouldn’t rise so much (due to ‘growth concerns’), and riskier assets like Bitcoin could rally in anticipation of not-so-hawkish monetary policy.

So far, Bitcoin hasn’t performed as an inflation hedge or store of value. Instead it has moved more or less in lockstep with the tech-heavy US100. Check out the chart and correlation.

Bitcoin vs USD

A correlation of 1 would mean the two are perfectly correlated, so a 0.9 reading indicates a very strong correlation. Correlations don’t usually hold indefinitely and Bitcoin is still pretty young as an asset. But it IS maturing.

Last week, Fidelity Investments announced they would be offering Bitcoin as an investment option for their 401(k) retirement plans by the middle of this year.

Fidelity is the largest 401(k) plan provider in the United States, acting as custodian for 23,000 plans, which have 20.4 million participants. In total, those plans represent $2.7 trillion in assets under management.

The move could be significant, opening the door for up to 20% of savings to be deposited into “Digital Asset Accounts”. The name suggests that Bitcoin will not be the only digital asset offered in future.

The US Labor Department was critical of the move. Acting assistant secretary Ali Khawar gave an interview to the Wall Street Journal, saying

“We have grave concerns with what Fidelity has done,”.

Mr Khawar added,

“For the average American, the need for retirement savings in their old age is significant,” “We are not talking about millionaires and billionaires that have a ton of other assets to draw down.”

Regulators including the SEC have become more vocal about the need for clearer rules and disclosures in the crypto ecosystem. Regulation will likely open the industry to more potential inflows, but that will probably come with more restrictions…

For now, will liquidity withdrawal matter most?

While the Fed is the focus tonight, liquidity withdrawal from the global financial system in the form of higher interest rates and balance sheet reductions (Quantitative Tightening) looks likely to be the key theme in coming months.

The Reserve Bank of Australia finally began their hiking cycle on Tuesday. The Bank of England is expected to hit the 1% threshold and discuss outright asset sales on Thursday and the European Central Bank is also likely to end QE in June or July.

Bitcoin has flourished in an environment of “easy money”. Will the same be true in an era of increasingly hawkish central bank rhetoric and action?

Not investment advice. Past performance is not indicative of future results. Trading cryptocurrency may not be available depending on your country of residence.