Bitcoin’s drawdown mirrors its position before the Fed’s first hike in March 2022, raising questions over whether a relief rally could precede further losses.
- The Fed raised rates by 25bps on Wednesday, the first rate hike in over three years.
- Bitcoin was roughly 40% below its November 2021 peak when the Fed began hiking in 2022, then rallied around 18% before subsequently falling around 50%.
- Markets are pricing in another 75 basis points of tightening over six months, while rising oil prices threaten inflation progress.
The Federal Reserve raised interest rates by 25 basis points on Wednesday, taking its benchmark range to 3.75% to 4.00% in its first increase in more than three years. Markets are pricing in a further 75 basis points of tightening over the next six months.
History suggests a single hike could be unlikely. Since 1994, the Fed has gone “one and done” just once, with single increases also a rarity across the 12 tightening cycles since 1955.
Synergies with 2022 have already taken place. Bitcoin peaked around $69,000 in November 2021 and was down roughly 40% when the Fed first raised rates in March 2022. Today, it sits around 40% below its October high of $126,000.
Following the initial March 2022 hike, bitcoin rallied roughly 18% over the following 12 days before subsequently falling around 50%. That raises the possibility that another relief rally could give way to a prolonged bear market. However, one comparable cycle offers limited evidence, and bitcoin’s decline in 2022 coincided with losses across equities, bonds and metals, alongside turmoil within the crypto industry.
The reason the Fed hiked rates on Wednesday was inflation. Annual headline inflation has remained above 2% for over five years, although core inflation, which excludes food and energy, eased to 2.4%, its lowest level in five years. So progress is being made.
However, that progress has now been faced with an energy shock. Geopolitical tensions in the Middle East have pushed both WTI and Brent crude well above $100 a barrel, threatening to reignite inflation and squeeze growth. Global bond yields have also climbed, with the U.S. 10-year Treasury yield reaching 5%, adding further pressure to financial conditions and risk assets.
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