The Crypto Market is not Affected by the 75bps Rate Hike. When will its Bear Market Inflection Point Come?

On November 2 (UTC), Fed raised the benchmark interest rate by 75 basis points to a range of 3.75%-4%, which is 75 basis points of interest rate hikes four consecutive times. As for now, a total of 355 basis points of interest rate hikes have been accumulated in 2022.

Affected by the news, the crypto market suffered a brief setback. BTC fell slightly from 20796USDT to a low of 20066USDT, a decrease of 3.5%, and then slightly increased to the current 20314USDT.

The cryptocurrency market’s price decline has become less and less affected by the Federal Reserve’s interest rate hike.

A review of this year’s Fed rate hike events. The Federal Reserve officially began to discuss the issue of interest rate hikes from January 25 to 26, 2022. The core issue is mainly solving the economic problems caused by the expansion of US dollar liquidity since 2020. However, the target interest rate range remained unchanged at 0-0.25% in the first quarter, and the first rate hike in 2022 was not announced until March 26.

At the time, all media and institutions were worried that Fed would raise interest rates by 50 basis points. However, the final announcement was only a 25 basis point interest rate hike. Hence, since the result was in line with most people’s expectations, BTC shortly gained by 10.59% in 4 days.

But in the long run, the probability of the Fed raising interest rates is inevitable. After ten days of sideways trading, BTC began to fall from 47,199 USDT on April 5th to May 4th. Fed announced a new round of 50 basis points of interest rate hikes, and the funds began to flee again. As a result, BTC experienced a new round of downward decline, which only stopped falling at 17,626 USDT on June 18 but encountered sideways fluctuation at the same time.

Although the rate hike of 75 basis points on June 15 caused BTC to drop by 30.3% for four consecutive days, but June 19 was the crucial emotional inflection point. The public seemed immune to rate hikes, and the amount of capital flight became smaller. BTC also rose steadily to 24,879 USDT in the following days, with its highest gain of 41.14%.

However, at the same time, the price of BTC began to be affected by CPI. On August 12 and September 12, the price of BTC fell continuously on these two dates, which basically coincided with the announcement time of CPI in the United States. The CPI can reflect the effectiveness of interest rate hikes. This means that if the 75 basis point hike does not curb inflation sooner, it is likely to maintain a rate hike of 75 or even more than 75 basis points.

Judging from the data, between the crypto market declination and the Fed rate hike, the former seems immune to the latter. Unless there is the occurrence of a larger rate hike. This could be seen when institutions fled and liquidated; the 75-basis-point rate hike did not cause a new round of capital flight.

M-Research has written many times previously and pointed out that the crypto bull market from June 2020 to November 2021 was mainly caused by the entry of institutions. The core reason was that institutions avoided the risk of depreciation of the US dollar by allocating BTC and ETH. But again, the core reason for the downturn in the cryptocurrency market is also caused by institutions. When the Fed began to implement monetary tightening policies, institutions began to sell off cryptocurrencies, and funds flowed back from the crypto market to hard currencies such as the US dollar.

What will drive the new bull market in cryptocurrency if a wild prediction needs to be made?

This time, Powell hinted that future meetings would slow down the pace of interest rate hikes. Multi-party analysis pointed out that Fed is expected to split its decline into three stages: from December this year to March 2023, the rate hike rate will be reduced from 75bp to 50bp and reduced to 25 basis points in May 2023, and the final interest rate will rise to 5.5%-5.75%. Regardless of the accuracy of the results, when Fed’s tightening monetary policy begins to bear fruit and gradually reduces the rate of interest rate hikes, institutions will reallocate crypto assets, resulting in a new round of bull markets.

In addition, Ethereum is one of the most important forces in the cryptocurrency market. Its current market value is $186.4 billion. Although the market value has dropped by 67.38% compared with $571.6 billion in November last year, the core project of Web3 is still mainly concentrated in the Ethereum ecosystem.

First, after the integration of Eth2.0, ETH began to accelerate into the deflation process. In the past 30 days, its total supply has continued to decline, with a cumulative decrease of 56955.01 pieces, worth about $88.98 million. The daily average, seven-day average, and 30-day average ETH supply are all negative growth. Typically, XEN Crypto (XEN) project alone consumed over 4491.03 ETH within seven days.

Looking back on May of this year, the issuance of the Otherdeed NFT project alone consumed 62,423 ETH in gas fees, accounting for about 79% of the total gas consumption of the Ethereum network for nearly 3 hours. How much will the deflation of ETH be if it happens now, with the ETH staking rate increasing due to the merging of Eth2.0 to PoS and with the burning mechanism of EIP1559?

In addition, as to add to the Eth2.0 solution, the four major Layer 2 projects of Ethereum mainly solve the scalability problem of transactions. At present, the total TVL value of Ethereum Layer 2 is $5.1 billion, and only the TVL of Arbitrum and Optimism has reached $4.2 billion.

Another contributing factor to the last bull market was the development of DeFi and NFT (both of which promoted the detonation of GameFi and the metaverse), but their development was also constrained by the lack of scalability of Ethereum itself. However, as Arbitrum, Optimism, StarkWare, and zkSync have begun to solve this problem, it will only be a matter of time before DeFi and NFT usher in a new round of detonations at the application layer.

If Ethereum, Layer 2, and the Fed’s monetary policy shifts stack up, it will be the best inflection point for cryptocurrencies to go from a bear market to a bull market.