Bitcoin, the world’s most dominant cryptocurrency, pared losses during the Asian trading session on Thursday on the back of a report that the U.S Federal Reserve officials have approved the central bank’s plan to accelerate pandemic stimulus withdrawal.
“In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities, ” the Federal Reserve stated in it’s Wednesday 15, December 2021 minutes.
Bitcoin gained about 2 percent immediately the news became public before moderating to 1.03 percent as at the time of writing.
The digital asset had risen to $69,000 on November 10 after data showed U.S inflation quicken to a 30-year high of 6.2 percent in October. The virtual currency has since dropped by more than 30 percent as financial markets started pricing in rate hikes for next year immediately the consumer price report showed inflation escalated to 6.8 percent in the month of November, a four decades high.
Here is the logic, tightened monetary policy is generally bearish for risk assets like the crypto. This is because institutional investors behind most crypto moves generally halt capital inflow into crypto space for a more stable asset with an expected increase in interest rates like the bonds and other fixed-income assets.
Despite crypto space potential and returns in recent years, the space is still not regulated. Hence, institutional investors backing bitcoin and other cryptocurrencies will always prefer moderate gain on a stable investment to a fraud-ravaged and uncertain space like the cryptocurrency.
The crypto space has already priced in two rate hikes and gradual withdrawal of pandemic stimulus for 2022. Therefore, prices are unlikely to drop any further provided no additional developments.
“Beginning in January, the Committee will increase its holdings of Treasury securities by at least $40 billion per month and of agency mortgage‑backed securities by at least $20 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses,” the Fed added.
