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The Sell-Off In Bitcoin Could Intensify

By AMarkets CompanyCryptocurrencyJan 14, 2022 05:03AM ET
The Sell-Off In Bitcoin Could Intensify
By AMarkets Company   |  Jan 14, 2022 05:03AM ET
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The cryptocurrency market experienced the worst start of the year in history, losing hundreds of billions of dollars of capitalization in just a few days. Back on Dec. 31, Bitcoin was trading at $46,500. Now, the buyers are making huge efforts to keep the rate above $40,000.

The latest selloff in the cryptocurrency market is associated with fundamental changes in the Federal Reserve's monetary policy stance. The regulator started to take decisive moves to fight inflationary pressure. In November, the Fed announced reducing its asset purchase program, which implied pouring $120 billion into the economy every month.

The Fed decided to speed up the tapering process during its December meeting and ultimately stop the "printing press" in March. After that, the regulator intended to start raising interest rates.

Traders saw even more hawkish signals in the Fed's last meeting minutes, published on Jan. 5. As it turned out, the voting members of the FOMC are ready to act much more decisively than the market expected, projecting three rate hikes in 2022.

At the moment, traders in interest-rate futures are pricing in a 71% chance that the Federal Reserve will raise its short-term target rate at its March meeting. According to the CME Group, a month ago, shortly after the Omicron variant emerged, they had estimated a 32% probability. Moreover, the Fed is likely to reduce its $8.8 trillion balance sheet next year after it doubled in size during the pandemic.

The hypothesis that the Fed's unprecedented stimulus policy contributes to the growth of the cryptocurrency market has long been supported by the correlation between the volume of cash injections into the economy by the world's central banks and the growth of risky assets.

Now the reverse process is beginning. Liquidity is being withdrawn from the market. For this reason, monetary policy tightening in the US will affect the value of money and the risk premium. Let us recall that risky investments show the highest yield during periods of market euphoria, but they also demonstrate severe losses when the market goes into a panic mode.

Market participants believe that the key interest rate increase in the US will cause panic among investors, who are likely to reallocate their funds into safe-haven assets such as bonds and gold. Against this background, bitcoin may well find itself among the main outsiders and risk sinking to $30,000.

The Sell-Off In Bitcoin Could Intensify

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The Sell-Off In Bitcoin Could Intensify

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