If you haven’t heard it already, the U.S. Federal Reserve’s interest rate hike sprint has begun, so make sure to pay off your credit card debt ASAP.
Wednesday, the Fed confirmed what has long been anticipated by traders and economists, or the “fed bringing a water gun to an inflation war,” if you ask Anthony Pompliano. In a statement, the Federal Open Market Committee (FOMC), the central bank’s monetary policymaking body, said it would lift the Federal Funds rate by 25 basis points, to a 0.25%-0.5% target rate.
No surprise here. Fed Chair Jerome Powell already hinted at rate hikes at the FOMC’s March meeting and earlier this month, during a testimony before two congressional panels. Powell reiterated how strongly he feels about a quarter-percentage point increase, which gave traders plenty of time to price in a hike and weaken the effect of Wednesday’s decision on asset prices. Wall Street doesn’t like to be surprised, and the Fed doesn’t like to surprise Wall Street.
It’s not only traditional bankers who are carefully parsing the words out of Powell’s mouth; crypto traders are listening, too. Some crypto bros believe bitcoin (BTC) to be a hedge against inflation because it can’t be manipulated by an FOMC-type body.
But recent bitcoin movements don’t back this theory. The largest cryptocurrency by market cap is down nearly 30% over the last year, while inflation has been climbing to a four-decade high. Even Tesla CEO Elon Musk said Monday that in times of high inflation it’s best to put your money in “physical things.”
He might be right. Traders want to store their money in a safe haven asset that shows high levels of stability. However, with bitcoin’s volatile history, investors might prefer to go with the traditional alternative: gold.
“Inflation still has less influence on bitcoin’s price than other speculative factors. … The idea that bitcoin is an inflation hedge has really not been proven yet, it’s still kind of somewhat theoretical,” said Scott Bauer, a former Goldman Sachs trader who's now CEO of Prosper Trading Academy.
But the Fed’s decision certainly had an effect on bitcoin. The cryptocurrency briefly dipped to $39,513 after the decision but then quickly rebounded, climbing as high as $41,454 on Wednesday and trading slightly below $41,000 on Thursday morning.
Messari founder Ryan Selkis seemed very bullish after the Fed news, tweeting a picture that seemed to imply that bitcoin would stay over $40,000 for a while.
You can think what you want about the correlation between bitcoin and inflation. In the end, bitcoin is a lot of things to a lot of people, and that’s what makes it exciting to watch. Some people think of it as a technology. To others, it’s a form of payment or simply a store of value, whether inflation is high or low.
This week, the cryptocurrency has moved enough to reinforce the idea that it could be a way to make money at a time when the state of traditional money makes you think twice about heating your living room.