Crypto currencies drop as investors weigh Fed rate decision

Bitcoin tumbled 4.8 per cent to $26,895.88, while ether dropped 4.1 per cent to $1,726.58

Crypto currencies dropped on Wednesday as investors considered the latest policy decision from the Federal Reserve.

Bitcoin tumbled 4.8 per cent to $26,895.88, as per Coin Metrics. Ether dropped 4.1 per cent to $1,726.58, after a big move higher on Tuesday.

The Fed approved a quarter percentage point interest rate hike at the conclusion of its latest policy meeting, expressing caution about the recent banking crisis and suggesting that hikes are coming to an end. Fed estimates call for just one more hike in 2023.

A 25 basis point rise was widely expected. The decision makes it the ninth interest rate hike in a row and the second quarter-point consecutive hike after a series of bigger rate hikes were implemented throughout 2022.

The expectation was that the long-awaited dovish tone from the Fed would eventually arrive in the midst of this banking crisis. Those hopes were dashed by Powell’s comments that rate hikes could continue as long as things continued to stabilize, weakening some of the momentum that has been driving crypto’s rise in recent days, according to Michael Safai at the crypto trading firm Dexterity Capital.

A lot of what has led the latest bitcoin rally – the ongoing weakness in the banking system and the probability for increases in central bank balance sheets – has not disappeared totally, he added. This could provide a floor for crypto currencies once the wider institutional response to the Fed settles down.

Still, comments by Fed Chair Jerome Powell in the press conference after the meeting were more hawkish than the market anticipated, even though he ‘poured cold water on fears over a credit crunch and deflation emanating from the banking crisis,’ as per Michael Rinko, venture associate at AscendEx.

Comments from U.S. Treasury Secretary Janet Yellen that she is not considering expanding the Federal Deposit Insurance Corporation’s insurance limit of $250,000 also alarmed investors, Rinko further said.

Bitcoin’s volatility has come back this month, sending the crypto currency’s price over 20 per cent higher for the month and bringing its YTD gains to over 70 per cent. At the same time, its correlation with stocks has broken, after trading in lockstep with equities for nearly two years. Though, macroeconomic factors are still the biggest drivers of bitcoin’s price.

I think a lot of traders will be deflated by bitcoin’s pull back towards $25,000, since the markets were actually expecting to break past the symbolic $30,000 level, said Safai. This will likely sap some of the momentum behind crypto prices in the short term, but that could easily change if the banking sector continues to show weakness.