Sky high interest rates are what the crypto market needs.
The US Federal Reserve Open Market Committee's September decision on interest rates was fully expected, with the FOMC rate at its current level of 5.25% to 5.5%. Also, as expected, the Committee indicated that another rate hike is likely this year, with Fed Chairman Jerome Powell – as usual – calling the job of returning inflation to the Fed's 2% target “no way” at a press conference on September 20.
What's even more surprising is the fact that the Fed has raised its long-term forecast for the federal funds rate to now stand at 5.1% by the end of 2024 – up from a June forecast of 4.6% – in 2014. before falling to 3.9% by the end of 2025 and 2.9% by the end of 2026. These numbers are notably higher than previous forecasts and indicate a “higher” scenario for US interest rates that many market participants did not expect.
As such, we saw markets pull back slightly, with the S&P 500 down 0.80% shortly after the announcement, followed by the Nasdaq, which fell 1.28% – a big fall for these headline indexes. Cryptocurrency markets also reacted negatively, with Bitcoin (BTC) falling from $27,000 and Ether (ETH) falling 2% to over $1,600 shortly after Powell's press conference.
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Ultimately, the data show that the U.S. economy is returning to conditions not seen before the 2008-2009 financial crisis, with economic growth and inflation relatively flat. US interest rates averaging nearly 4% over three years would be no surprise in this old world, nor would annual inflation exceed 2%.
The problem is that investors have become addicted to central banks pouring money into our economy quickly and freely to fight simultaneous crises. We are now in an investor mindset where strong economic growth and stable inflation are interpreted as bad news – and crypto markets seem to feel the same way. This is particularly interesting considering that Bitcoin was founded during the financial crisis in direct criticism of the loose monetary policy decisions of the Federal Reserve, the Bank of England and others.
What is now clear is that we cannot rely on central banks to meet our investment obligations. Instead, we should focus more on the actual health of companies and the services, products and services they provide to their customers. In the crypto world, we must carefully focus on the viability of the crypto ecosystem and what it can offer its users as an alternative or complementary financial market.
In the short-to-medium term, of course, this means that we will all be sitting down and waiting for the US Securities and Exchange Commission to make a decision on the Bitcoin ETF applications sitting on the table. The world's largest asset managers.
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Franklin Templeton – one of the oldest asset managers in the US – has joined BlackRock, Fidelity, Invesco and others in the race to launch the world's largest cryptocurrency mass market fund. If one is even accepted, this will indeed mark the internment of Bitcoin into the hall of fame for international assets, and we can expect cryptocurrency to join portfolios around the world as an alternative investment in the upcoming bull market. While the SEC favors one industry giant over another, we can predict many uncomfortable Upper East Side dinner parties.
If the SEC is true to form and does not approve any of these applications, Bitcoin and other cryptocurrencies will remain marginal assets. That doesn't mean they won't find new price drivers and return to previous all-time highs. But until this issue is resolved one way or the other, we definitely won't see much action in the crypto markets.
Likewise, the FOMC decision and Powell's comments indicate that we won't see much cheer on the macroeconomic side for the foreseeable future. But if the U.S. and global economy return to normal — uncharted territory for investors under 40 — it could be exactly what the world and cryptocurrency markets need.
Lucas Kiely is the Chief Investment Officer of the Product Application where he oversees investment portfolio allocations and leads the expansion of the diversified investment product range. He was previously Chief Investment Officer at Diginex Asset Management, and was Senior Trader and Managing Director, QIS and managed the structured derivatives business at Credit Suisse in Hong Kong. He was Head of Special Derivatives at UBS in Australia.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
