Bitcoin vulnerable ahead of 'negative impact' from expected rate hikes

Quick Take

  • Chart technicalities show bitcoin ‘vulnerabilities’ ahead of expected rate hikes by the ECB and BoE on Thursday.
  • Narratives surrounding BlockRock’s spot bitcoin ETF application and loose monetary policy decisions in China and Japan could bolster confidence in the digital asset.
  • However, reliance on narratives rather than fundamentals is precarious; they could just as easily catalyze more downside pressure.

Bitcoin finds itself at a crossroads this week, wedged between contradictory monetary policies and vacillating investor sentiment.

As the UK and Eurozone gear up for anticipated central bank rate hikes this week, the digital asset will be in the crossfire of any macroeconomic decisions that could have broad impacts on risk-on investments. Specifically, all eyes are on this Thursday's meeting of the Bank of England's monetary policy committee, where rates are predicted to rise to 4.75%, or even 5%.

Simultaneously, the European Central Bank is projected to implement a 25-basis-point hike on the same day. Last week, ECB President Christine Lagarde announced in a press conference that only a substantial "material change" would deter the central bank from increasing rates.

Crypto risk-on

“The upcoming rate hikes from the ECB and BoE are likely to have a negative impact on risk-on investment in general and crypto included,” Konstantin Anissimov, an independent digital asset analyst, told The Block.

He noted that higher interest rates can lead to a stronger dollar and higher returns for low-risk government bonds, potentially making crypto assets less attractive to investors.

"Higher interest rates make it more expensive to borrow, which can dampen risk appetite," he said. "Higher interest rates can also lead to a stronger dollar and higher returns for low-risk government bonds, which can potentially make crypto assets less attractive to investors."

Craig Erlam, a senior market analyst at Onanda, had a similar appraisal of bitcoin’s position. In a Tuesday note, he described chart trends that "remain against bitcoin and until it breaks the pattern of lower highs, recovery rallies that fall short of recent peaks before falling again, it will continue to look vulnerable."

'Young and volatile'

Yet, this negative impact is not set in stone, as Konstantin Anissimov stressed the digital asset market is "still relatively young and volatile," and emerging narratives could sway it either way.

"The market could rebound if there are other positive factors at play, such as the recent news of Bitcoin ETF filing by BlackRock, or the news that Deutsche Bank filed for a crypto license with BaFin," Anissimov added.

Philippe Bekhazi, CEO of XBTO, corresponded with this view, arguing that idiosyncratic factors have somewhat decoupled crypto markets from broader risk assets. "From my vantage, narratives, and headlines, have been dominating the market," he told The Block.

Bekhazi pointed to a "clear divergence in themes in global regions, with the EU and China taking a more accommodative stance towards crypto in general than the U.S., which continues to crack down and cause uncertainty domestically."

This macroeconomic narrative is further complicated by a contrasting stance in East Asia, where China's rate cuts and expected stimulus could "perk the crypto market."

China rate cuts

"The rate cuts in China and expected stimulus could perk the crypto market and this is because the Asian region is a major geography in the crypto market, and any positive news from the region could have a ripple effect," Anissimov told The Block.

However, he added that, in the long-term, the major question remains as to whether these events are enough to get higher mass adoption and to divert investors away from low-risk investments "which in itself generate a circa 5% return at the moment."

Anissimov pointed out that potential downsides would result from any economic stagnation or growth impediment in the U.S. due to interest rate-related decisions. He added that these could negatively impact the crypto market, given its high correlation with traditional financial markets.

"Crypto markets have for the last 18 months or so had a high correlation with the S&P500 and similar index funds, and interest rates are linked to inflation and would affect the performance of the U.S .economy on the whole," he said. "Any change which would stagnate or impede the growth of the U.S. economy will very likely have a negative impact on the crypto market. This is of course only true until there is an event that de-correlates crypto markets from the traditional financial markets."

(Updates with quote in sixth paragraph.)

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