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Bitcoin Plunges to $18,500 as Fed Mulls Record 100 BPS Interest Rate Hike


coincodex.com 19 September 2022 12:50, UTC
Reading time: ~4 m

Key takeaways:

  • Bitcoin lost over 8% of its value to start off the week, dropping close to its YTD lows
  • The upcoming interest rate hike, which investors think could be the largest in decades, and the growing strength of the US Dollar are likely to blame for the price drop
  • Similar to crypto assets, the US stock market has also been negatively impacted by the macroeconomic conditions

Bitcoin revisits yearly lows, S&P 500 slips below 3,900

The total crypto market cap plunged by more than -8% to $925 billion to start off the week, leading to massive dips in the prices of most digital assets.

Bitcoin has fallen from above $22,000 it was trading at last week to the $18,000 territory, for a total 7-day price drop of over -17%. Despite the highly anticipated Merge upgrade, Ethereum performed even worse in the same time period, losing -26% of its value in the past week alone.

At press time, BTC/USD is trading less than $1,000 removed from its yearly low it hit on June 19, when the world’s largest cryptocurrency was changing hands at $17,689.

Similar to crypto assets, US stocks have also been trading in the red zone over the last couple of days. S&P 500, a stock market index that is widely considered a good indicator for measuring the overall health of the US economy, lost over -5% in the past five days, falling below 3,900 points. Since the start of the year, the index has lost more than -19%.

What is driving the negative market activity?

At this point, virtually everyone is aware of the macroeconomic factors contributing to the poor market performance of expansionary assets this year. Rising inflation, the aftermath of Covid-19 stimulus packages, the war in Ukraine, and the energy crisis have each played a part in creating a hostile environment for crypto and traditional investors.

However, there are two reasons that could be highlighted as the primary reasons for the latest Bitcoin dip. We’ll examine both of them in the following sections.

Investors fear Fed could increase the interest rate to 3.50% at the September FOMC meeting

The Federal Open Market Committee (FOMC) is slated to hold its 6th meeting this year on September 21. Investors fear that FOMC will announce another massive interest rate hike, especially considering that Consumer Price Index (CPI) data for August 2022 showed inflation increased by 0.1% from July to August, despite previous rate hikes. 

20% of investors believe Fed will raise interest rates by a full percentage point. Image source: CME FedWatch Tool

According to interest rate futures-tracking CME FedWatch Tool, 80% of traders at the leading derivatives marketplaces think the Fed will announce the third consecutive 75 basis points (BPS) hike, bringing the federal funds rate to 300-325 BPS. However, 20% think that a 100 BPS hike is more likely, which would bring the rates up to the 325-350 BPS range.

Going forward, economists polled by the Financial Times predicted that the restrictive monetary policy will likely endure beyond 2023, resulting in the funds rate peaking between 4% and 5%. 

US Dollar continues growing stronger

After a relatively small dip in the value of the US Dollar Index (DXY) earlier this month, the USD regained momentum and hit 109.72 points on Friday, coming very close to its multi-decade high of 110.32 points the index reached on September 8th. 

The US Dollar Index between 2016–2022. Image source: DailyFx.com, TradingView

DXY is essentially a measure of the strength of the US Dollar against a basket of other major fiat currencies. Its relevance for the investing community lies in the fact that a strong dollar typically means that expansionary assets – such as tech stocks and digital currencies – are doing poorly. 

Crypto analyst Matthew Hyland believes that we are “heading toward a blow off top of the US Dollar,” however, a capitulation of gold, Bitcoin, and stocks will likely supersede it. “[T]here is nothing that says the DXY has topped,” noted the analyst.

We are heading toward a capitulation event


We are also heading toward a blow off top of the US Dollar

When? No clue but there is nothing that says the DXY has topped

It's actually currently in position for the highest weekly close of the year: pic.twitter.com/UHrJfYsSQP

— Matthew Hyland (@MatthewHyland_) September 15, 2022

A light at the end of the tunnel?

With Fed’s upcoming hike and ever-strengthening USD, there is little reason to be optimistic about the short-term prospects for Bitcoin and other digital assets. However, looking at longer time scales, Bitcoin could see a substantial rally in the second half of 2023, according to our automatic BTC price predictions. 

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