The bitcoin market has tiptoeed into “extreme fear” as the Federal Reserve prepares to meet on Wednesday to decide its next move on interest rate policy and quantitative easing. BTC is trading at around $ 48,000 at the time of writing, nearly 30% off its November all-time high of $ 69,000.
The Fear and Greed Index analyzes market sentiment and emotions from various sources to calculate a number from zero to 100. The closer the index is to its lower bound, the more fearful the market is right now. The opposite is true of greed when people start buying bitcoins for fear of missing out (FOMO). The metric is currently 16, which indicates extreme fear.
With mainstream media reporting expectations for the Fed meeting and indicating a reasonable likelihood that the central bank will try to contain inflation by hike rates faster, financial markets are poised to change their investment thesis. While the move is unlikely to happen until next year, the Fed has acted quickly to keep consumer prices from rising well above its 2% target.
Market expectation for faster settlement of security purchases is not speculative. Late last month, US Federal Reserve chairman Jerome Powell said the central bank’s bond-buying program could end earlier than planned amid rising inflation rates and a more robust US economy. Powell added that he and his policy makers would be debating whether it was appropriate “to complete our shopping a few months early”.
However, tapering is only part of the deal, and a rate hike is the natural follow-up. Since the beginning of the pandemic, the Fed has kept interest rates close to zero in order to further increase market liquidity and provide economic relief for participants. Overall, this dynamic led investors to look to riskier investments as their traditional investments were no longer able to generate large returns. If the Fed hikes rates quickly and prematurely, the broader market is expected to move into risk-off mode and make “safer” investments as the risk / reward ratio favors traditional money-making strategies.
For most investors, Bitcoin is still considered a risky investment. Although the digital currency network has consistently demonstrated its ability to protect investors from inflation and loose economic policies, and to enable real financial sovereignty for those who do not have access to traditional banking, its early phase in the introductory curve and its young development status has remained with many skeptical. As a result, a wider risk-off movement is expected to impact the Bitcoin market as well.
However, it is unclear whether this would pay off, as Bitcoin has shown that it can quickly recover from somewhat damaging events. After China banned bitcoin mining and then bitcoin trading, the network is now stronger than it was before, with even more hash rate power to support its consensus protocol. An eventual bitcoin sell-off caused by a more aggressive stance by the Fed could have the same result – a strong uptrend after irrational fear was washed out of the market.
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