Bitcoin erases post-FOMC drop; correlation with stocks breaks – Cryptocurrency News



On Wednesday, Bitcoin and most altcoins plummeted but did not approach their 2022 lows, after the Fed proceeded with the widely expected third consecutive 75 basis points rate hike and signaled a more aggressive tightening path. Surprisingly, cryptocurrencies quickly bounced back and have already wiped off their losses as both Bitcoin and Ethereum snapped their four-day losing strike despite the sustained sell-off in major US equity indices. Was this a temporary divergence or is cryptocurrencies’ correlation with equities fading?

Macro conditions to deteriorate

At the September FOMC meeting, the Fed reiterated its willingness to continue hiking interest rates and keep them elevated for as long as it takes until inflation gets under control. This development spells double trouble for digital coins as on the one hand they are a non-yielding asset class, while investors are also likely to curtail their exposure to risky assets as tight financial conditions are expected to stick around for longer. Moreover, we shouldn’t forget that cryptos thrived in a period with exactly the opposite characteristics, those of excess liquidity and low interest rates in global markets.

In addition, Jerome Powell acknowledged that the possibilities of a soft landing are diminishing as the Fed’s top priority remains to restore price stability, hinting that a recession could not be ruled out. This scenario of course could have a catastrophic impact on risky assets such as cryptos.

Stocks vs Cryptos

Even though the correlation between Bitcoin and equity markets is currently at record high levels, the broader crypto space not only outperformed but moved massively against the stock indices on Thursday. However, it is too early to call for a correlation break as the crypto markets' immature nature is often responsible for some wild swings.

Firstly, significant events, such as the FOMC meeting, often cause overreactions to crypto markets,  due to the relative inexperience and lack of expertise of their participants. Therefore, these spikes tend to retrace faster than the moderate reactions in equity space. Furthermore, cryptocurrencies are currently trading closer to their 2022 lows than equities are, thus any declines are facing solid support at ‘buy the dip levels’, whereas the downside potential for stocks is actually greater.

Systemic woes re-emerge

In 2022, the crypto market crash has been continuously exposing flaws and failures in several cryptocurrency projects and business models, delivering significant blows to the trustworthiness of the broader crypto space. Although these phenomena had wound down lately, new scandals emerged in the blockchain world.

The founder of the Luna-Terra ‘stablecoins’ has an arrest warrant on his name by the South Korean authorities over allegations of breaking several capital markets laws. In addition, last Tuesday, the crypto brokerage firm Wintermute reported that hackers stole digital assets worth around $160 million, without affecting the firms’ solvency though.

Technical levels to watch

Taking a technical look, despite its latest drop, Bitcoin is currently trading around the pre-FOMC levels.

Broader weakness could send the price to test its recent low of 18,150, a violation of which might turn the spotlight to the 2022 low of 17,588.

On the flipside, bullish actions may encounter initial resistance at 20,400 before the recent peak of 22,775 comes under examination.

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