Bitcoin and ethereum plummet before the arrival of rate hikes and the end of stimulus

Black Friday for cryptocurrencies. The imminent arrival of interest rate hikes in the US and the possibility that monetary policy may have to be more restrictive than expected to combat inflation is causing some panic in risk assets. Although cryptocurrencies have been one of the assets with the greatest beta During the rising phase, now they are also presenting the biggest falls: bitcoin and ethereum drop around 8% in 24 hours.

Bitcoin is down nearly 8% and losing the $40,000 zone that has served as support in previous corrections. On the other hand, ethereum is left a little more than 9% and falls to the $2,800 zone. Among the major cryptos, Binance Coin is undergoing the most severe correction with declines exceeding 10% to $427.

Once again, the falls in the cryptocurrency market come hand in hand with the turmoil in the stock markets and in the bond market. The central bank seems poised to withdraw stimulus faster than expected, draining some of the liquidity that has lifted stock, bond or crypto prices since mid-2020. With higher interest rates and less stimulus, valuations of assets could seek a new lower break-even point in a market dominated by sentiment risk-off.

Analysts at BCA Research explain in a note published this morning that “the price of bitcoin and other cryptocurrencies has become increasingly strongly correlated with the path of stocks.”

Indigestion period for stocks and cryptocurrencies

“Our end-2022 target for the 10-year US Treasury yield is 2.25%… Stocks often experience a period of indigestion when yields rise sharply”, explain these experts. If stock markets suffer volatility, bitcoin and the rest of the crypto universe will have to deal with a much more turbulent scenario.

These movements can generate a kind of vicious circle in which the falls in the stock markets generate important corrections in the cryptocurrencies and these in turn have an impact on sentiment again, putting downward pressure on the rest of the markets. This was warned a little over a week ago by the International Monetary Fund. Cryptocurrencies are big enough and interconnected enough to trigger a domino effect in the markets.

“Bitcoin and ethereum showed little correlation with major indices stocks before the pandemic. They were thought to help diversify risk and act as a hedge against fluctuations in other asset classes,” these experts explain. It was common to read and hear analysts comparing bitcoin to gold for its ability to diversify a portfolio and act as a hedge against inflation or corrections in other markets dominated by risky assets The data that could support this hypothesis has evaporated with the latest crisis.

“As such, a sharp drop in bitcoin prices can increase investors’ risk aversion and cause equity markets to decline…suggesting that sentiment in one market spills over to the other in a noticeable way.” “warns the report of the International Monetary Fund.

To the turn of the wheel of the central bank and the warnings from the IMF, we must add the report published this week by the Bank of Russia warning of the enormous risks that this market generates for financial stability and proposing, in a subtle way, the prohibition of the use and mining of cryptocurrencies in the country. The Bank of Russia gave the example of other countries that have already regulated with direct prohibitions, such as China or Iran.

The Fed accelerates and bitcoin falls

However, the big trigger for the correction comes from the US central bank. Since the Federal Reserve seems to have bet by a faster-than-expected tightening of its monetary policy, risk assets, especially bitcoin, ethereum and other cryptocurrencies, have suffered greatly. The ‘queen’ cryptocurrency has lost 40,000, while Wall Street also suffers from draft corrections. It is in these episodes of panic or euphoria that the feeling between some assets and others feeds off the most.

Since November 2021, just when the markets began to forecast several rate hikes in the US and the Federal Reserve began to change its speech with inflation, bitcoin is left more than 40%.