How Interest Rate Affects Bitcoin and Risk Assets.
The decision made by a group of 12 individuals about how much money will cost can have a significant impact on their lives.
The 12 members of the so-called “FOMC”, the American Monetary Policy Committee, met once again to define what money is worth, or in other words, the interest rate. This decision has a significant impact on your daily life, even when it comes to Bitcoin.
Monetary policy activity today has become the main asset pricing driver on the planet and BTC cannot escape it.
Let's understand why this is moving the market so much and how it forces the high correlation between traditional economy and Bitcoin.
The chart above shows the price movement in the minutes following the announcement of the hike in the US economy's basic interest rate, announced by the central bank's monetary policy committee.
Going to the highest level since 2008.
This rate will dictate a number of elements of the traditional economy, including interest rates on loans, real estate financing, lines of credit for corporate investments, among others.
Meaning that the “cost of money” has increased.
This type of action influences the reduction of both corporate and family expenses, since there will be less credit available.
Reducing spending and consumption will lead to reduced growth and subsequently higher unemployment.
The current low unemployment was widely commented yesterday by Powell, chairman of the Fed.
For them, a certain level of increase in unemployment will “help” control prices in the real economy, which has the highest price inflation in the last 40 years.
In other words, the state itself will punish the economy in an attempt to undo what their excessive fiscal/monetary lack of control has generated.
Currency tightening is a tool to try to reduce the circulating supply of dollars in the US and in the world. For this, they need to withdraw part of the capital that is also in financial assets, especially risky ones.
This is why all assets are penalized, the economic nature becomes “risk-off”, where capital flows from higher to lower risk. Bitcoin continues to be traded as a risky asset, with its correlation with the SP 500 at 0.91
But this does not mean that it will be like this forever, only that the long-term thesis has not yet been established widely, nor within the institutions that trade the largest volume.
With the continuation of the contractionary policy, assets will remain under pressure and this week Powell tried to make this as clear as possible.
It is possible to have a long period of upswing and sustaining high rates before a real pivot.
Pivot this one in which I had already commented here that was not yet close to occur.
It is possible that a real pause will only come at the end of next year, according to the FED itself.
However this could change.
When?
At a time when the rise occurs in the midst of high inflation, it pushes a bigger slump in the economy, bordering on a recession.
At this point, the Fed will need to change its game and ease financial conditions before something really bad happens. This output is considerable.
Bitcoin will continue to be under pressure and even if it does not make new funds, a quick recovery is not yet on the horizon.
This is the kind of scenario that can hurt the impatient but can reward the patient hoarders.
Choose your lifeboat.
This research article was initially published on this BlockTrends link. Graphics and study developed by Cauê Oliveira