Wednesday, October 5, 2022

Crypto rally: Here’s why investors must tread with caution

On Wednesday, the Fed’s decision to hike interest rate by the widely anticipated 0.75 percentage point led to a quick crypto rally. In fact, as of writing, most crypto prices are still in the greenland because of the newly-announced monetary policy.  The two leading cryptocurrencies Bitcoin (BTC) and Ethereum (ETH) saw their prices spike by 9% and 13%, albeit respectively, over the last 24 hours. And while BTC surpassed the $23,000 mark, ETH also surged above the $1,600 level. Interestingly, this is the general case across the wider market.

Investors must be cautious of crypto rally

While it is easy to get carried away by the rallying crypto prices, there are doubts that it could be sustained for long. This is because recession risks remain.

Firstly, the 0.75 percentage point hike is the fourth hike so far in 2022. In fact, June’s 0.75 percentage point hike was the second of such since 1994. Now, the issue here is that when the Fed continues to raise rates like this, there is an undeniable risk that the U.S. may be plunged into an economic slowdown. This is exactly the shadow of doubt hanging over the digital assets market.

Also, not much could be gotten from Fed chair Jerome Powell’s speech about future interest rate decisions. Although he mentioned that inflation levels are broadly in line with neutral interest rates, there was a notable lack of any detailed forward guidance. The Fed chair did not expressly state what to expect from the next decisions. He only mentioned, albeit vaguely, that the decisions would be driven by data.

For what it’s worth though, markets seemed assured of the Fed’s commitment to combat inflation. And this can be seen in the crypto rally as well as booming stocks.

Nonetheless, nothing tangible will happen until the economy either breaks even or goes down. In any case, we could be in for a stalling moment for the time being. So, Bitcoin trading in the range of $20,000 give or take 10-15%, should not come as a surprise.

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