Bitcoin and Cryptocurrencies Fall as Fed Resists Rate Cuts

Bitcoin and other cryptocurrencies experienced a decline on Thursday, following the downward trend of stocks. This drop came after the Federal Reserve pushed back against expectations of an immediate interest rate cut, which had been anticipated by the market. Furthermore, another significant macroeconomic event is anticipated to occur on Friday.

Within the last 24 hours, the price of Bitcoin has fallen by 2% to reach $42,150. Although it had reached a two-week high at nearly $44,000 recently, it now remains above the crucial psychological threshold of $40,000. However, it has been unsuccessful in reclaiming levels above $48,000, which was its peak during the trading frenzy over spot bitcoin exchange-traded funds (ETFs) in mid-January of this year.

The decline in digital assets on Thursday coincided with the stock market experiencing its worst day in 2024. The Federal Reserve’s decision to maintain interest rates at their current level during their recent monetary policy meeting was followed by Fed Chairman Jerome Powell’s resistance against the possibility of an imminent rate cut. This contradictory message challenged investor expectations, as traders had been betting on a rate cut as early as March or May. However, these expectations were scaled back by Thursday.

Interest Rate Expectations Impact Bitcoin and Cryptos

The recent shift in interest rate expectations has had a significant impact on Bitcoin, similar to the effect seen on the Dow Jones Industrial Average and S&P 500. Cryptocurrencies, like other risky assets such as stocks, are sensitive to changes in borrowing costs. This is because higher interest rates reduce the incentives for investors to buy riskier assets like equities or tokens.

The market had to readjust its expectations for the scale and pace of rate cuts throughout the rest of 2024, which caught many interest rate bulls off guard. Steve Clayton, the head of equity funds at Hargreaves Lansdown, said, “Interest rate bulls effectively had their legs cut away from beneath them after that message.”

The release of the U.S. jobs report for January on Friday could play a key role in shaping the narrative. Weakness in the labor market revealed by the report may renew support for bets on a Federal Reserve rate cut in March or May. However, if the report indicates that the economy continues to thrive, it will reinforce Powell’s message that rate cuts may take months to materialize.

Bitcoin was not the only cryptocurrency affected by this shift in interest rate expectations. Ether, the second-largest crypto, experienced a 2% drop to $2,270. Other smaller tokens or altcoins also saw declines, with Cardano down by 2% and Polygon sliding by 4%. Memecoins like Dogecoin and Shiba Inu also suffered losses, each shedding about 1% of their value.

Overall, the impact of interest rate expectations on the cryptocurrency market is undeniable. As investors continue to monitor macroeconomic factors and central bank policies, these shifts will likely play a crucial role in shaping the future of cryptocurrencies.

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