The Bitcoin market has tip-toed into “extreme fear” territory as the Federal Reserve prepares to meet Wednesday to decide its next move regarding interest rate and quantitative easing policies. BTC is trading at around $48,000 at the time of writing, nearly 30% below its November all-time high of $69,000.
The Fear and Greed Index analyzes market sentiment and emotion from different sources to crunch a number from zero to 100. The closer the index is to its lower bound, the more fearful the market is at the moment. The inverse is true for greed, when people begin purchasing bitcoin out of fear of missing out (FOMO). The metric is currently at 16, denoting extreme fear.
As mainstream media reports expectations for the Fed’s meeting, citing a reasonable probability that the central bank will attempt to curb inflation through a faster interest rate hike, financial markets stand ready to switch its investment thesis. Although the move isn’t likely to come until next year, the Fed has been moving quickly to prevent consumer prices from soaring well above its 2% target.
The market expectation for a faster wrap-up of asset purchases isn’t speculative. At the end of last month, Federal Reserve Chair Jerome Powell said the central bank’s bond-buying program could end sooner than planned amid rising inflation rates and a more robust U.S. economy. Powell added that he and his fellow policymakers would discuss whether it would be appropriate to “wrap up our purchases a few months earlier.”
However, tapering is just part of the deal, and an increase in interest rates is the natural follow-up action. Ever since the beginning of the pandemic, the Fed has kept interest rates near zero in an attempt to further increase market liquidity and economic relief to participants. Altogether, that dynamic prompted investors to seek riskier assets as their traditional investments couldn’t yield big profits any longer. If the Fed raises interest rates quickly and before anticipated, the broader market is expected to switch to risk-off mode and plug into “safer” investments as the risk-reward ratio favors traditional money-making strategies.
For most investors, Bitcoin is still considered a risky investment. Although the digital monetary network has demonstrated time and again its ability to shield investors from inflation and loose economic policies and enable true financial sovereignty for those who can’t access traditional banking, its early stage in the adoption curve and status as a young development has many remaining skeptical. As a result, a broader risk-off movement is expected to affect the Bitcoin market as well.
It’s unclear whether that would play out, however, as Bitcoin has demonstrated an ability to swiftly recover from somewhat harmful events. After China banned bitcoin mining and then bitcoin trading, the network is now stronger than before and has even more hash rate power backing its consensus protocol. An eventual sell-off in Bitcoin caused by a more aggressive take by the Fed might end up having the same result — a sharp upside after irrational fear is flushed out of the market.