Accelerated Tapering Priced In, But What Does it Mean for Bitcoin Going Forward?
Bitcoin continues to trade around $48k and Ether under $4k as the market eagerly awaits the Federal Reserve’s meeting to wrap up on Wednesday.
The market is preparing for a hawkish central bank, expecting it to accelerate its tapering of asset purchases, a reduction in stimulus, that would allow the officials to begin lifting rates next year. The stimulus efforts have been underway for more than a year and are now started to get wound down as economies recover from the pandemic.
According to trader and economist Alex Kruger, there has been a major change within the Fed with their focus shifted from reducing unemployment to reducing inflation.
“This shift translates into a Fed more likely to raise interest rates sooner and faster. Financial markets have been pricing this hawkishness, with many risk assets correcting lower and the yield curve flattening.”
Now, the big question is, what will the central bank communicate today at its last FOMC meeting of 2021.
In Kruger’s view, “accelerated tapering delivered yet mostly priced in,” adding, “Tapering is secondary, what matters is expectations on the path of future rates.”
Everyone in finance is waiting for tomorrow.
One thing I can tell you for certain, the books will trade paper thin for the next 5-15% in either direction, especially on the ask side.
If you repositioned expecting to “get back in”, you’ll probably experience a lot of pain.
— Zaheer (@SplitCapital) December 14, 2021
Given there has already been a sell-off going on since last week, the hawkish move is already priced in and is not likely to have a negative impact on prices.
Bitcoin is currently down about 30% from its all-time high of $69,000 last month, while Ether is 20%. Meanwhile, the overall crypto market cap is just above $2.3 trillion, down from above $3 trillion early last month.
With derisking in anticipation of the hawkish Fed also extensive, crypto having experienced a 20% to 50% crash already in December, many have already panic sold their crypto assets.
“Therefore, if the Fed were to deliver accelerated taper, signal two hikes for 2022, and nothing else, I would expect a rally across asset classes,” added Kruger.
But still, if Fed Chairman Jerome Powell goes even more hawkish than expected, the market could easily get blasted with fighting inflation, becoming the number one political priority right now.
To Cathie Wood, CEO, and co-founder of Ark Invest, the issue is deflation and not inflation, and it will be the most significant risk for the economy and financial markets in the year ahead.
“We feel like we’re experiencing the same kind of naysaying right now” as when the fund previously made large bets on Bitcoin and Tesla before their marvelous rally, Wood said. “Our confidence in our strategy has increased” despite the losses recorded for the year to date, she added.
This month should be interesting. A lot of people anticipating FOMC this week.
— Deribit (@DeribitExchange) December 14, 2021
For now, the worst-case scenario is a replay of December 2018, when the Fed crashed the market. “For BTC, that would take the price to $42K, which should be defended,” Kruger said, adding, “Whatever ends up happening, expect tomorrow's close to determine the trend into year end.”
Galaxy Digital’s Mike Novogratz is of a similar opinion as he said $42,000 is an important level and that the low 40s should hold. But he isn't worried about the prices in the short term. Novogratz in an interview said,
“So much money is pouring into the space, it would make no sense that the crypto prices would go much below that.”
“If you’re long, it feels painful, but it’s probably healthy.”
He further expects 2022 to be the year of DeFi which “got unloved” this year due to issues related to KYC policies that hurt its prospects for institutional adoption.
While we will see a lot of volatility in the short term, Noelle Acheson, head of market insights at Genesis Global, expects Bitcoin “to start to find its place in portfolios going forward” because the crypto asset is not linked to the economy in any way.