Bitcoin Soars, but Don’t Get Excited

BitcoinBTCUSD +0.45%  and other cryptocurrencies were rallying on Thursday as investors piled back into risk-sensitive assets following the Federal Reserve’s latest decision on monetary policy. But analysts don’t see this crypto rally as having strong legs and predict prices are likely to stagnate at current levels.

The price of Bitcoin jumped 8% over the past 24 hours to $23,000. The largest crypto surged in the wake of the Fed’s Wednesday afternoon announcement on monetary policy, which delivered Bitcoin its best day in almost a month. Bitcoin has made a steady advance from a bottom below $18,000 in June, topping out around $24,000 last week, before sliding back as markets headed into this turbulent week.

However, “Bitcoin’s short-term outlook is still a little precarious,” Yuya Hasegawa, an analyst at crypto exchange Bitbank, wrote in a note.

Digital assets seem almost entirely beholden to macro factors at this point. While factors within crypto itself—like the failure of hedge fund Three Arrows Capital or a regulatory probe into exchange  Coinbase Global (ticker: COIN)—have influenced prices, the correlation between digital assets and stocks reigns supreme. 

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Bitcoin and its peers should theoretically trade independently of mainstream financial markets, but have shown to be largely linked to stocks—especially tech stocks—and have followed the S&P 500 and Nasdaq lower in a selloff this year. Bitcoin just capped its worst quarter since 2011 and the total market value of crypto has collapsed to $980 billion from nearly $1 trillion nine months ago.

The most dominant macro force at the moment is inflation at a multidecade high and the Federal Reserve’s response to it. The Fed announced it would raise interest rates by 75 basis points on Wednesday, or three-quarters of a percentage point. 

Markets seemed to take assurance from the Fed’s commitment to fighting inflation and indication that rate hikes could slow down soon, buoying stocks and cryptos alike.

But recession risks remain. The 75 basis-point increase is the fourth interest rate hike this year and only the second 75 basis-point increase since 1994, with the first being in June. The concern is that as the Fed continues to raise rates and dent economic demand, it risks plunging the U.S. into an economic slowdown. That uncertainty is likely to hang over the digital asset market for a while yet.

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“Markets are adrift including crypto. Until the economy breaks either up or down not much is going to happen,” Chris Terry, an executive at lending platform SmartFi, said in a note. “We anticipate that Bitcoin will continue to trade in this tight range of $20,000 plus or minus 10-15%. None of this should be a surprise. We could be in this stalled market for weeks and weeks.”

In addition, there are signs in the crypto derivatives market that Bitcoin’s recent rally may be slowing. Trading in derivatives such as futures and options based on digital tokens represents the majority of all crypto trading. The volume of derivatives traded on exchanges in June was $2.8 trillion, compared with $1.4 trillion of tokens traded on exchanges, according to crypto data firm CryptoCompare.

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“There are additional signs that look to threaten the longevity of this crypto rally, namely a bearish shift in options. The technicals have flipped and it will be harder for crypto prices to keep rallying on short covers,” Luke Farrell, a trader at crypto market maker GSR, wrote in a note. 

Short covering refers to when traders who have taken short positions—bets that an asset will fall—must buy back the underlying asset to close their position, adding buoyant buy pressure to the market.

“My expectation is consolidation between …$19,000 to $23,000 for Bitcoin for the rest of the summer, as global macro keeps leading the way,” Farrell said.

Beyond Bitcoin, EtherETHUSD +1.16%  —the second-largest token—rose 12% to $1,650. Altcoins, or smaller cryptos, were similarly soaring, with SolanaSOLUSD +0.20%  up 9% and Cardano climbing 7%. Memecoins—initially intended as internet jokes—also gained, with DogecoinDOGEUSD +0.14%  and Shiba InuSHIBUSD –0.88%  7%, and 6% higher, respectively.

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