Cryptocurrencies aren’t delinked from traditional markets — the influence of US Fed policies on crypto markets is another proof

• Prices recovered by up to 10%, after initial sell-offs depressed values by 4%.
• The US Federal Reserve is headed towards curbing inflation and easy money.
• For now, it has left the interest rates unchanged.

Cryptocurrencies like Bitcoin are aspiring to be ‘digital gold’. They want to remain valuable even when traditional markets are tanking. However, that is yet to become a reality.

Ahead of the meeting of the US Federal Reserve, the central bank of the world’s largest economy, the crypto markets were in the red in the face of uncertainty. Once the US Federal Reserve announced that interest rates would remain unchanged on December 15— even in the face of inflation — they all bounced back into the green.

Price movement in the top 5 cryptocurrencies, before and after the US Federal Reserve’s meeting:
Source: CoinMarketCap

Why do crypto markets care about interest rates?

As mentioned earlier, cryptocurrencies want to be ‘digital gold’, which also implies being a hedge against inflation. In the US, and in other economies around the world, the push for more money circulated in the economy to drive demand has made things more expensive.

Sooner or later, analysts expect the monetary authorities to start tapering back the excess money supply. This would be done by increasing interest rates and pulling back on buying bonds.

According to analysts, higher interest rates could cause investors to let go of their riskier investments — like cryptocurrencies — for safer bets, like assets and stocks in the traditional market.

With cryptocurrency being further integrated into the economy, monetary policy decisions taken by the largest economy in the world affect crypto prices more than one might like.

On December 15, members of the US Federal Reserve policy committee met to decide upon the course they should take. And, it didn’t involve changing the interest rates — for now. Thus far, the decisions taken at the meeting have had no immediate impact on crypto policy, nor drastic unexpected changes at a macro level.

Sell the rumour, buy the news

At least a few people in the crypto community ended up “selling on the rumours, and buying on the news” in a classic fashion, and moving the market accordingly. When executed successfully, such a manoeuvre is expected to allow a trader to sell holdings at a higher price, and buy them back soon after at a lower price, thus resulting in a profit. Investors who might have been sitting on the side-lines, waiting for an opportunity to buy a digital asset of their choice at a lower price, get their wish as well.

The result was that except for stablecoins, major cryptocurrencies tracked by CoinMarketCap dipped to lows for the fifth time in the last seven days — albeit, for a very short time. The market saw a 4% dip on average on the morning of December 15, when there were rumours of drastic changes in money supply policies.

But, when the decisions were announced three hours later, cryptocurrencies saw an immediate recovery with gains of up to 10%. It should be noted, that while the market did dip in the face of the US Federal Reserve meeting, the downturn was not as drastic as the flash dips seen earlier this week.

Tom Lee from Fundstrat, an independent research boutique, told CNBC, “I think the band aid is getting pulled off. The market’s been waiting for this. It was selling off on the rumor and it’s time to buy the event”

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