Click here to download this article.
Bitcoin took in stride the Federal Reserve’s first hike in over three years, with a 6.8% rally an indication of what’s to come on reduced uncertainty around the process of normalization
- Bitcoin and ether rallied following the first rate hike in over three years as investors found more clarity around the Fed’s process
- Contrary to popular opinion, rate hikes do not derail bull markets. We assess the most recent rate rising environment in which bitcoin rallied over 2,000% from the first hike in Dec ’15 to next cut in Sep ‘19
- Interest rate probabilities illustrate expectations the Fed will cut in 2025 and bitcoin investors take note of the everlasting cycle of monetary accommodation
In one of the most highly anticipated Federal Reserve meetings in quite some time, Fed Chair Jerome Powell and the FOMC announced the first rise to the US benchmark policy rate in over three years.
This decision is now historical: two years ago, the world was turned upside down with a pandemic virus that shutdown economies, businesses, and citizens for months on end. As a response, zero interest rate policy and quantitative easing was implemented immediately alongside historical fiscal packages that helped support the black-swan event that shutdown global economies.
Since then, the world has reopened, employment has returned, and consumers have gone back to spending. But despite the strength in the rebound, the Federal Reserve maintained ZIRP and QE for two years under the guise of “transitory” and “average inflation targeting.”
Since February of 2020, the Federal Reserve’s balance sheet doubled to $8.9T, US M2 grew 41% to $21.8T, US corporate debt rose 15% to $11.6T, and US consumer prices increased by 5%+ y/y for ten straight months in a row.
This period led to a significant rally in digital assets as bitcoin rose from a low of $3,914 in March of 2020 to $41,137 by Monday’s close.
Now, investors question if the asset class can “party without the punch” through monetary “tightening.”
What was illustrated last week is that reduced uncertainty around what the Fed could do versus now what the Fed is doing led to a significant rally across risk-assets. Bitcoin gained 6.8% and ether gained 12.9% last week, and US equities experienced the largest weekly return since November of 2020 with the Nasdaq Composite gaining 8.2%
So in the first rate hike in over three years, bitcoin and ether rallied. Now, investors have a tangible roadmap of six more hikes in 2022, and renewed Fedspeak since the meeting has prepared investors for the potential of 50bp increments as well.
Any further reduction in uncertainty and volatility should be positive for bitcoin and ether, which we experienced last week as the VIX index declined from a high of 33.8 to a close of 23.9.
Where are we now?
While much of this quarter’s decline has been around monetary uncertainty and geopolitical risk, bitcoin, ether, and US equities are now above both January FOMC levels and the lows reached after the initial invasion of Ukraine.
This to us illustrates the importance of maintaining conviction and even adding on weakness in times of uncertainty.
As of Monday’s close, bitcoin is 16.3% higher from its closing lows of $35,365 on January 23rd, while ether is 23.3% higher than its closing lows of $2,361 on January 27th.
It's Not All About The Tightening
Given that bitcoin is only 13 years old, it’s experienced just one rising rate environment. As we now enter a second tightening regime, a look back at previous performance can offer perspective on bitcoin’s ability to rally through a less accommodative monetary period.
Previously, the Fed hiked interest rates in Dec ’15, Dec ’16, 3x in ’17, and 4x in ‘18. In this period, average daily transaction volume rose from $409m to $5.1bn, hash rate rose from 0.7 to 77 EH/s, and the total number of addresses with >$1 rose from 3.1m to 20.0m. By the time the Fed cut in July of 2019, bitcoin rallied 2,220%, including the parabolic advance to $20k. The S&P 500 rallied 34% in this period, and 46% from the first hike in June 2004 to the next cut in September 2007.
While the market remains susceptible to headlines and rotations on Fedspeak and the likes, long-term investors have historically been rewarded for maintaining conviction and climbing the “wall of worry.”
History doesn’t repeat itself, but it often rhymes.
Already, market participants have priced in the Federal Reserve’s next rate cut.
As we remember from 2019, fixed income and derivative traders backed the Fed into a wall, ultimately resulting in Fed Chair Powell cutting the Fed Funds Rate by July of that very year. Now, market participants are already pricing in an overshoot by the Fed, with estimates of a 2.63% policy rate by March of 2024 and just 2.27% by March of 2025.
Bitcoin and digital asset investors take note of the bigger picture: the everlasting cycle of “brrr” and monetary accommodation.
While bitcoin can hedge against inflation expectations, monetary inflation, and price inflation over time, the asset and digital asset class also benefits from low interest rates. Little competition from bonds increases the need and attractiveness for risky assets, and bitcoin, ether, and crypto serve as an attractive alternative to high concentrations in US equities.
Click here for the full PDF. As always, please reach out with any questions or comments.
Joseph Orsini, CFA
Director of Research