Fed Raises Rates, 2022 Bitcoin Scenario Back on the Table: Rally First, Then a Sharp Crash?
The Fed’s latest interest rate hike has brought the 2022 scenario of a sharp crash following a brief rally back into focus for Bitcoin.
The Federal Reserve raised the policy rate to the 3.75-4.00% range for the first time in over three years. While markets expect an additional 75 basis points of tightening over the next six months, the debate over how Bitcoin might behave in this new cycle continues.
According to a comparison by CoinDesk, Bitcoin’s current outlook most closely resembles the 2022 rate hike cycle. After hitting a peak of around $69,000 in November 2021, Bitcoin dropped approximately 40% during the Fed’s first rate hike in March 2022. Today, the price sits 40% below the peak of approximately $126,000 seen in October.
Following the first rate hike in 2022, Bitcoin rose by 18% within about 12 days. However, this short-term recovery was followed by an approximately 50% decline. This historical similarity raises the possibility of a relief rally followed by a more sustained downturn in the new rate cycle.
It is rare for the Fed to stop after a single rate hike
Since 1994, the Fed has ended a tightening cycle after just one rate hike only once. In the 12 rate hike cycles since 1955, “settling for a single hike” has been quite rare. This strengthens expectations that the latest decision may not be an isolated event.
Nonetheless, the 2022 example does not guarantee that Bitcoin will follow the exact same path in the current cycle. At that time, Bitcoin’s decline was accompanied by losses in stocks, bonds, and precious metals, as well as turmoil in the crypto sector. The 2015 rate cycle offers a weaker comparison due to lower liquidity and a less developed market structure.
Energy shock and bond yields increase pressure
The backdrop of the Fed’s rate hike is the fight against inflation. While annual headline inflation has remained above 2% for over five years, core inflation—which excludes food and energy prices—fell to 2.4%, marking its lowest level in five years.
However, tensions in the Middle East have pushed WTI and Brent crude oil above $100 per barrel. This development increases the risk of inflation re-accelerating and economic growth coming under pressure. The yield on the 10-year US Treasury note has also reached 5%, tightening financial conditions and increasing pressure on risky assets.