As the stock markets continue to rise, the price of bitcoin has taken a tumble. The reason? The Federal Reserve has made clear that it’s ready to regulate Bitcoin and other cryptocurrencies.
Could the end be near?
Some experts are saying that this could be the beginning of the end for Bitcoin, as a regulated financial system would make it much harder for the cryptocurrency to thrive. So far, the prices have continued to drop in the face of these remarks – but who knows what could happen next?
The bitcoin price fell to its lowest point since September at one point on Monday, as rising interest rates continued to prompt investors to sell off positions in risky, growth-oriented assets.
Treasury rates on the rise
According to Coin Metrics, the Bitcoin Price dropped as much as 6 percent to a low of $39,771.91, recouping the majority of its losses. Around 4 p.m. ET, the stock was down about 1.3 percent, trading at the bitcoin price of $41,904.87. Ethererium, the second-largest cryptocurrency by market capitalization, recovered some of its losses as well. It fell as low as $2,940 in the morning trade and was the last trading at $3,090.67, a 3.4 percent decline from its opening price.
Drops in the cryptocurrency market follow a rough week for equities, particularly momentum stocks. Investors have been shifting into more cyclical and value names as the 10-year U.S. Treasury yield have risen to begin 2022. On Monday, the 10-year yield reached 1.8 percent, up from 1.5 percent at the end of 2021.
Poor Labor Market Report to blame?
The release of the U.S. labor market report on Friday, which showed that the unemployment rate fell to 3.9 percent, has bolstered the case for the Fed to raise rates concurrently with the end of asset purchases in March. Investors are pricing in a 73 percent chance of a 25 basis point rate hike in March, up from 61 percent last week, according to the CME Group’s FedWatch Tool.
Fears of a hawkish Fed gripped the bitcoin market near the end of last quarter, after the central bank shifted its focus from maximum employment to inflation control. The Fed announced in December that it would raise interest rates at least three times by the end of 2022, and that the asset purchase program would be phased out by March.
Bitcoin All-Time Highs
Bitcoin price reached a new all-time high of nearly $69,000 in November, following a soaring inflation figure that revealed the largest increase in consumer prices in 30 years at the time. As a result of this reading, investors flocked to inflation hedges such as bitcoin and gold.
Because of the way bitcoin has traded in tandem with equities in recent months, investors are more divided than ever on whether bitcoin is a viable inflation hedge. Goldman Sachs predicted last week that bitcoin would overtake gold as the world’s reserve currency and may eventually reach the Bitcoin price of $100,000.
Bitcoin Fall From Grace
Since November, however, cryptocurrency values have been rapidly declining, with bitcoin price losing around 40% of its value. Following the Federal Reserve’s announcement that it intends to begin shrinking its balance sheet, in addition to what investors have already been anticipating — the tapering of bonds and the rise of interest rates — bitcoin’s losses increased last week.
Bitcoin price falling is just starting.
On Friday, Yuya Hasegawa, an analyst at cryptocurrency broker Bitbank, issued a warning, stating that he expects the world’s largest cryptocurrency to continue falling until the broader market, which has also struggled since the Fed’s announcement on Wednesday, has digested the possibility of the Fed raising interest rates as soon as March.
Despite the fact that the Consumer Price Index (CPI) report on Wednesday shows that inflation rose more quickly than expected last month, Marcus Sotiriou, an analyst at UK-based digital asset broker GlobalBlock, predicted that bitcoin would remain around $40,000, arguing that the recent sell-off has likely priced in much of the negative expectations.
Option Traders weigh in on Bitcoin
In order to rule out externalities that are exclusive to the futures instrument, it is necessary to examine the options markets as well.
The 25 percent delta skew is used to evaluate options that are similar in both call (buy) and put (sell) characteristics. When fear is common, this measure will turn positive because the premium for protective put options is higher than the premium for similar risk call options.
When greed is the dominant emotion, the opposite is true, and the 25 percent delta skew indication shifts to the negative side of the chart.
In Conclusion
The Federal Reserve’s announcement that it is looking to regulate cryptocurrencies has caused Bitcoin prices to drop substantially. Fearful investors are selling their Bitcoins, resulting in the cryptocurrency losing 40% of its value since November.
Despite poor labor market reports, Goldman Sachs still believes Bitcoin will reach $100,000. If Fed interest rates rise as quickly as March, volatility will continue to push bitcoin prices lower.
Disclaimer
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