Facing a difficult environment once again, Bitcoin finds itself under pressure as the Fed sent a message that high interest rates are not going away anytime soon. Despite the 25 basis point hike to the 3.75%-4% level, the main concern for the cryptocurrency market is what happens from here on out, as expectations for rapid interest rate cuts wane. At the same time, investors are pulling significant capital from US spot Bitcoin ETFs, with outflows reaching a total of $602.2 million in two days. Specifically, outflows amounted to $450.4 million on September 15 and $151.8 million the following day, according to Farside Investors.
Two days are not enough to form a trend, and the first session preceded the Fed's announcement. However, they make it premature to conclude that the market has already fully absorbed the decision. Higher interest rates make the choice facing investors even more difficult. Short-term treasury bonds offer income with much less price uncertainty compared to Bitcoin. Bitcoin itself yields no interest. Investors who buy it must be willing to accept volatility for what they believe it can offer them over time. The same applies to institutional investors. A fund manager can believe in Bitcoin and yet reduce their exposure because borrowing costs have increased or because their clients desire lower risk. Institutional participation cannot be considered a permanent commitment to buy. The same investment committees that approve a position can subsequently downsize it.
The inflation problem
The source of inflation also requires greater attention. The conflict involving the US, Israel, and Iran has increased energy costs in an economy already facing persistent inflation. Higher interest rates cannot repair supply disruptions in oil. They can, however, curb spending and reduce the likelihood that an initial rise in fuel prices translates into more permanent inflationary pressures. It would be, however, overly simplistic to describe the problem purely as an energy issue. The Fed points to resilient domestic spending and strong investments. Its median forecast places core inflation, which excludes food and energy, at 3.4% for this year. There is enough underlying inflation to make it difficult to take an early reversal of monetary policy for granted. An energy shock does not by itself weaken the case for using blockchain technology for more efficient transaction execution. Nor does it alter Bitcoin's supply rules. But preserving the investment thesis is different from preserving demand. A household paying more for fuel has less disposable income available for investments. A fund facing redemptions from clients may sell an asset in which it still believes. The scarcity of Bitcoin cannot prevent any of these decisions.
What is happening in Europe
The pressure extends beyond the US. The European Central Bank raised interest rates by 25 basis points on September 10, citing inflationary pressures linked to the conflict in the Middle East. The next decision from the Bank of England was scheduled for September 17. This makes it necessary to monitor monetary policy across major economies, without assuming that their decisions are coordinated or that all will follow the exact same path. If more central banks move toward tightening, the cryptocurrency market will face a broader restriction in liquidity and investor risk appetite. Capital can move across borders, but fewer markets will offer cheap borrowing.
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