The recent FED meeting was likely the last reversal for the crypto market before the SEC’s final decision on bitcoin spot ETFs.

The Fed Cooks Bitcoin’s Perfect Storm. Experts agree that the Fed pivoted yesterday to a much more favorable course for the crypto market, setting the stage for 2024 that could kick off with major bullish catalysts for Bitcoin. If the Fed intended to cool expectations of interest rate cuts, the message from its chairman, Jerome Powell, “has served the opposite purpose.” This sentence from analysts at AXA IM sums up the relief the markets have greeted the Fed’s new roadmap for 2024. Fears of over-optimism after the rally that began in November had resulted in notable corrections in recent days, especially in the crypto market. The Fed meeting was one of the last tests to seal a very positive 2023 for digital assets.

Turning point

Cryptoasset experts do not hesitate to speak of a “turning point“. Ricardo Ossorio, head of investment at Protein Capital, highlights yesterday’s meeting of the US central bank that “the most important thing is that there is consensus among Fed members that, by the end of 2024, rates will be between 4.50% and 4.75%, with three estimated declines over the year“. In his view, “this marks an inflection point for the Fed from aggressive-neutral to neutral-passive, which is a very positive shift for digital assets.” The impact of interest rates on the crypto market has been evident in recent years. The Fed’s monetary cycles correlate with Bitcoin’s bull and bear cycles.

“The Fed’s positioning on interest rates and inflation has left its mark on cryptocurrency markets, with a particularly notable impact on bitcoin and other digital assets.”

Manuel Ernesto de Luque, founder and CEO of Block Asset Management.

Manuel Villegas, Digital Assets Analyst at Julius Baer, impacts this degree of correlation that exists between interest rates and risk assets. “Growing expectations of a rapid reversal in US monetary policy influence both US equity markets and bitcoin. Positive momentum in US net liquidity tends to go along with improving sentiment on crypto markets.” The analyst recalls in this regard that “there is no doubt that rising interest rates have affected crypto-assets, as the technological development of cryptocurrencies has relied heavily on private investors’ capital“, and notes that “there is also no doubt that the attractive yields that lower-risk assets have been offering have increased opportunity costs towards riskier alternatives, as evidenced by the adoption of US Treasuries and the nearly six trillion dollars now held in US money funds.”

FED’s Influence

The Fed’s relevance in the crypto market has been evident, without going any further, in recent weeks. “The Fed’s tone has been impacting the volatility of crypto markets,” highlights Manuel Ernesto de Luque, CEO of Block Asset Management. The fear of over-optimism, also extensible to traditional markets, gave way to a notable correction at the beginning of the week, putting the $40,000 level at risk. Simon Peters, an expert crypto-asset analyst at eToro, warned at this point that “in a context where the cryptocurrency market, and bitcoin in particular, are showing signs of weakness after weeks of gains, anything but good news, i.e. further confirmations of pauses or even suggestions of cuts, could affect the major crypto assets.”

Despite the market’s increased level of stringency, the good news was confirmed, and once the downward bias in rates adopted by the Fed was ratified Bitcoin turned higher. In its rebound it is now trading on the verge of $43,000, one step away again from its highs of more than a year and a half. The Fed’s messages also included additional macro stimulus for risk assets. Ricardo Ossorio, CIO of Protein Capital, draws attention to the fact that the Fed chairman “sees it very possible to cool the economy without causing a recession.” “A recession-free outlook paints a very positive prognosis for all risk assets but is especially bullish for digital assets,” Ossorio stresses.

“Perfect storm”

The significance of the relief granted by the Fed leads the head of investment at Protein Capital to suggest that the germ could be brewing for a positive “perfect storm” for Bitcoin, given the favorable confluence of several of the factors that play a more fundamental role in the evolution of the market in the short and medium term, ‘halving’ included. Following yesterday’s news from the US central bank Mr. Ossorio stresses that “today we are less than a month away from the ETF approval deadline, the Binance situation has been resolved without major consequences and, for now, it seems that the recession is being avoided. Thus, a clear path for growth in this industry in 2024 is beginning to loom, with high probabilities of an overall bull market, where the S&P and Nasdaq break all-time highs, and a tightening Fed monetary policy.“

Added to all these catalysts is “the bitcoin halving that is likely to occur in April“. Therefore, as the Protein Capital analyst points out: “If all these elements occur, it will be the perfect storm to have a historic bull run”. In his message, however, he includes a dose of caution: “Powell’s wise words should not be forgotten. There are no guarantees in the market, and the economy sometimes behaves in unexpected ways”. The confluence of positive stimuli for Bitcoin is a point also highlighted by Manuel Villegas. The Julius Baer digital asset analyst conveys that “a confluence of positive fundamentals has created the ideal conditions for the asset to rally, including the US exchange-traded fund (ETF) serial, long-term holder accumulation, speculation ahead of next year’s halving, and a growing conviction that the fastest and steepest US monetary tightening cycle has come to an end.“

Conclusion

Mr. Luque shares optimism in the outlook for 2024. “Against this backdrop, we at Block Asset Management express considerable optimism about the cryptocurrency market for 2024-2025. Despite recent setbacks, we maintain a bullish stance and are confident in the market’s upside potential, anticipating significant growth shortly.” The favorable outlook does not, however, prevent some calls for caution about Bitcoin’s behavior in the short term. Once the Fed’s revaluation is over, Manuel Villegas, from Julius Baer, puts the focus back on the most determining factor in the crypto market in recent months, the optimism about an imminent approval in the US of the first bitcoin spot ETFs. For this reason, and after the rally experienced by the cryptocurrency, he sees it likely that “prices could enter a consolidation phase before the focus returns to the imminent launch of US exchange-traded funds.“