The recent speech by Federal Reserve (Fed) Chairman Jerome Powell had a massive impact on the price of Bitcoin and other risky assets. Does the US monetary policy reversal mark the start of the long-awaited crypto bull market?
The global crypto market, led by Bitcoin, the largest digital asset by market capitalization, appears to be responding positively to a possible shift in monetary policy by the Fed. The Fed recently announced that it is likely to raise interest rates by only half a basis point in December 2022.
The prices of many cryptocurrencies rose significantly after the announcement.
But how are monetary policy and the Bitcoin price related, and how can the FED’s monetary policy affect the price development of digital assets?
Bitcoin price reacts to Powell’s speech
There has been consistent volatility in the crypto market over the past week. However, Bitcoin and most other cryptocurrencies continued to see price growth after Powell’s speech. After a 3% increase, the Bitcoin price managed to stabilize above the $17,000 mark.
At the time of writing, the BTC price is trading at $17,318.69, up 6.79% weekly. Powell’s comments on possible monetary easing by the Federal Reserve Committee (FOMC) appear to have boosted investor confidence. The FOMC will most likely raise interest rates by only 50 basis points instead of 75 basis points at the next meeting.
In addition, Powell’s encouraging signals regarding the trajectory of inflation and unemployment contributed to the bullish momentum in the BTC price and the US S&P 500 stock index. After four rate hikes of 3/4 percentage point each to curb high inflation, Powell expressed optimism about the next rate hike. According to Powell, the FED will only raise interest rates by half a percentage point at the next FOMC meeting (December 14, 2022).
How are policy rates and the BTC price related?
Crypto analyst Jan Wüstenfeld explained why the Fed’s monetary policy is relevant to the cryptocurrency with the current Bitcoin market cycle. Notably, the December 2018 peak in the Shadow Federal Funds Rate (the rate at which US financial institutions lend each other money) largely marked the bottom of what was then the bear market. In addition, the recent trough in the adjusted federal funds rate marked the start of the current bear market. When the Shadow Federal Funds rate began to rise sharply in December 2021, the current downward trend in BTC price started almost simultaneously.
One reason for the influence of the FED’s monetary policy on the Bitcoin price could be the advanced adoption of Bitcoin in recent years. In addition, there is the maturation of the crypto market accompanied by growing and new futures markets as well as the increasing interest of institutions at the macroeconomic level.
These reasons undoubtedly led to an increasing correlation between the crypto market and traditional financial markets.
Bitcoin and the unemployment numbers
In a recent video, analyst Benjamin Cowen pointed out that unemployment remained low despite the Fed’s rate hikes. Historically, moderation of rate hikes has also produced good results for risky assets.
According to Cowen, Bitcoin should start the new year with a slight upward trend if the fed funds rate remains between 4 and 5% by the end of the year. Additionally, Bitcoin and other cryptocurrencies may benefit from the positive US jobs report. This may encourage investors to become more active in the market again.
When will bitcoin price hit bottom?
As on-chain data suggests, the crypto market may hit the next macro bottom along with the next peak of the Shadow Funds Rate.
The Bitcoin Market Value to Realized Value (MVRV) indicator also gives an interesting indication that the BTC price will bottom out soon. This indicator weights Bitcoin’s market value (number of all BTC times its price) with the realized market value (all BTC times the respective purchase price).
A recent analysis by CryptoQuant shows that longer periods in the lower value range match the Bitcoin bottom almost exactly. Bitcoin price is currently undervalued as it was at the time of the last bottom.
The indicator, as seen above, showed a value below 1 for the following periods:
- 2015: 300 days with a minimum of: 0.6
- 2018: 134 days with a low of 0.69
- 2022 (at press time): 170 days with a minimum of 0.74
We must still expect the MVRV indicator to fall further in the current bear market given the current macroeconomic conditions. Moreover, the indicator has not yet fallen to the previous lows. Therefore, it is difficult to predict when the Bitcoin price will really hit the bottom.
Nevertheless, the further price development of Bitcoin will probably depend to a large extent on monetary policy and other macroeconomic factors such as inflation and unemployment figures.
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