Bitcoin Clears Post-FOMC Drop;  Correlation With Stock Breaks – Cryptocurrency News

Bitcoin Clears Post-FOMC Drop; Correlation With Stock Breaks – Cryptocurrency News

On Wednesday, Bitcoin and most altcoins plunged, but failed to come close to their 2022 lows, after the Fed pushed ahead with the widely anticipated third consecutive 75 basis point rate hike and signaled a more aggressive tightening path. Surprisingly, cryptocurrencies quickly recovered and have already wiped out their losses as both Bitcoin and Ethereum broke their four-day losing strike despite ongoing sell-offs in major US stock indices. Was this a temporary deviation or is the correlation of cryptocurrencies with stocks fading?Macro conditions to deteriorateAt its September FOMC meeting, the Fed reiterated its willingness to continue to raise interest rates and keep them high for as long as necessary until inflation is under control. This development poses twin problems for digital currencies, as they are a non-performing asset class, while investors are also likely to curtail their exposure to risky assets as tight financial conditions are expected to last longer. Moreover, we must not forget that cryptos flourished in a period with the exact opposite characteristics, that of excess liquidity and low interest rates in global markets.

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

Stocks vs Cryptos

While the correlation between Bitcoin and stock markets is currently at an all-time high, the broader crypto space not only outperformed but also moved massively against stock indices on Thursday. However, it is too early to argue for a correlation break, as the immature nature of crypto markets is often responsible for some wild swings.

First, major events, such as the FOMC meeting, often trigger overreaction in crypto markets, due to the relative inexperience and lack of expertise of their participants. Therefore, these spikes tend to return faster than the moderate reactions in the stock space. In addition, cryptocurrencies are currently trading closer to their 2022 lows than equities, so any declines face firm support at buy the dip levels, when the downside potential for equities is actually greater.

Systemic misery resurfacesIn 2022, the crypto market crash has continuously exposed shortcomings and failures in various cryptocurrency projects and business models, dealing significant blows to the reliability of the broader crypto space. While these phenomena have subsided lately, new scandals have cropped up in the blockchain world.

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