Cryptocurrency traders have split over the impact of the Fed’s upcoming rate hike on Bitcoin

The US Federal Reserve (Fed) is likely to raise the benchmark cost of the loan by 75 basis points (0.75%) on Wednesday in an ongoing effort to drain liquidity to curb inflation. Cryptocurrency traders are divided on how bitcoin (BTC) would react to rate hikes.

Griffin Ardern, a volatility trader at cryptocurrency asset management firm Blofin, predicts a drop in the price of bitcoin after the Fed hiked rates by 75 basis points (bps) at the window of 2.25% to 2, 5%.

“Given that the overall risk level of the cryptocurrency market has not returned to a reasonable level, it is very likely that the price of BTC will drop by more than 10% after the Fed rate hike,” Ardern said.

The Fed’s liquidity sucking measures, such as rate hikes and balance sheet liquidations, have rocked asset markets in recent months. Bitcoin has been down more than 50% since the central bank launched the tightening cycle in March.

“Bitcoin and the broader cryptocurrency market could see another rally after the rate hike by 75bps, after which we expect markets to trade sideways, while ether (ETH) may outperform in the merger forecast.” according to Dick Lo, founder and CEO. from quantitative trading firm TDX Strategy.

Perhaps both traditional and cryptocurrency markets have been pricing in the upcoming 75bp hike, with Fed officials hinting at such a move in recent weeks.

Bitcoin fell 7% in the week leading up to Wednesday’s Fed event. “We see participants taking a risk-free approach prior to the FOMC decision as expected,” Lo replied when asked about pre-Fed flows in the cryptocurrency market.

At press time, federal funds futures, derivatives based on the benchmark interest rate, priced the likelihood of a move from 75 basis points to 75%, along with a 25% probability of a 100 basis point increase .

Trader and analyst Alex Kruger said the cryptocurrency market could see a small recovery after a 75bp rate hike, but warned of a drop if the central bank were to surprise with a 100bp move. However, Fed officials had rejected a full percentage point hike earlier this month.

Beyond the rate hikes

Attention will focus on the concern of policy makers about the risks of unemployment and the impending recession in Europe.

The market has become convinced that inflation has peaked and the Fed will opt for slower rate hikes after July, possibly cutting rates next year. This appears to be evident from the 28 basis point drop in the 10-year Treasury yield over the past seven days. At press time, the yield was nearly 2.8%.

Risky assets, such as bitcoin, could rise if the Fed policy statement or President Jerome Powell seemed increasingly concerned about recession risks, bolstering market expectations for a political pivot (from easing restrictions) in 2023.

However, observers expect the Fed to keep its focus on controlling inflation while minimizing recession fears.

“There is no question that Powell will roll, but this year there won’t be, at least until November, and there won’t be a significant reduction in rate hikes (like 25 basis points). The reason is that the Biden administration has I need the Fed to join them in expressing its determination and confidence in the fight against inflation to win the November mid-term elections, ”Ardern de Blofin told CoinDesk.

According to Jon Turek, author of the blog Cheap Convexity, the Fed should stick to the June scenario.

“We are in this state of time inconsistency where the Fed is reacting to the June CPI and the market is negotiating the European recession. The Fed will side with the June CPI and I think to a greater extent than risk assets suggest right now, ”Turek said in a Fed Insights released Tuesday.

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