The Federal Reserve meeting on Monetary Policy is looming and the market sentiment is dropping.
As the Federal Reserve prepares for Wednesday’s meeting to determine its next moves regarding quantitative easing and interest rates, the Bitcoin market has moved into “extreme fear” territory. BTC trades at $48,000 as of the writing of this article, almost 30% lower than its November record of $69,000.
The Fear and Greed Index analyses market sentiment and emotion to calculate a number between zero and 100. The more the index is close to its lower bound, then the market is more afraid. For greed, people who buy bitcoins out of fear of missing the opportunity (FOMO), it is the opposite. This metric currently stands at 16 and denotes extreme fear.
Mainstream media expects the Fed to meet, citing a reasonable possibility that the central bank will try to reduce inflation by a faster interest rate rise. Financial markets are ready to change their investment thesis. The Fed is moving fast to stop consumer prices rising well above the 2% target, even though it won’t happen until next year.
It is not speculative for the market to expect a quicker wrap-up of asset purchase purchases. Federal Reserve Chair Jerome Powell stated that the central bank’s bond buying program could be ended sooner than expected due to rising inflation rates and a stronger U.S. economic environment. Powell said that Powell and his fellow policymakers would consider whether it would make sense to wrap up their purchases a few more months in advance.
Tapering is only part of the deal. An increase in interest rates is the next step. In an effort to increase liquidity in the market and provide economic relief, the Fed has maintained interest rates at near zero since the start of the pandemic. Investors began to look for riskier assets because traditional investments were no longer able to make big profits. The Fed raising interest rates rapidly and without warning is likely to cause the wider market to shift to risk-off mode, and to invest in’safer investments’ as the risk-reward ratio favors traditional money making strategies.
Bitcoin remains a risky investment for most investors. While the digital currency network has proven its ability to protect investors from inflation, and allow for loose economic policies, and allow true financial sovereignty for people who cannot access traditional banking, many remain skeptical due to its young stage of adoption and its status as a new development. A wider risk-off movement is expected also to impact the Bitcoin market.
Although it is uncertain whether this will happen, Bitcoin has shown a remarkable ability to quickly recover from some very bad events. The network has greater hash rate power and is stronger than ever after China banned bitcoin mining. A Fed more aggressive approach might lead to a Bitcoin sell-off . This would be a sharp up-side after irrational fear has been flushed from the market.