Bitcoin is in for a long year as traders increase their bets to predict five Fed rate hikes in 2022
- Bitcoin was attempting to rally this week, but the Fed and Jerome Powell stamped out the rebound.
- Markets are now expecting five interest rate hikes in 2022, according to Bloomberg data, following Wednesday's Fed meeting.
- Analysts expect unprofitable technology stocks and crypto to stay under pressure for a while yet.
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Bitcoin was attempting to stage a recovery this week after falling dramatically over the last month. But Jerome Powell and the Federal Reserve stamped out that rebound on Wednesday.
The world's biggest cryptocurrency was 3% lower to $36,671 Thursday on the Coinbase exchange, after the Fed chair failed to rule out numerous interest rate hikes this year. Markets shifted their position Thursday to pencil in five increases in 2022, up from four on Wednesday.
The difficulty crypto investors face right now is that digital assets are moving in lock-step with technology stocks, which are highly sensitive to changes in expectations about Fed policy.
The tech-heavy Nasdaq 100 also made a sharp turn lower Wednesday. The index is down around 13% so far this year, while bitcoin has dropped more than 25% and is far below November's high of $69,000.
Markets now expect five rate hikes in 2022
Both crypto and tech stocks had been attempting to find some stability before the Fed decision. Many bitcoin investors grew more optimistic on Wednesday, arguing that the market knew what was coming: four rate hikes in 2022.
"Markets may have fully priced in these expectations, and market conditions may be pointing towards a favorable move after the meeting," Sean Farrell, head of crypto at Fundstrat, said in a note ahead of the meeting.
Yet Powell took a tougher stance on inflation at his press conference than many were expecting, shifting investors' expectations.
Now markets are predicting five hikes will this year take interest rates to around 1.25%, according to Bloomberg data. That's clouding the picture for bitcoin and other cryptocurrencies.
Investors turn to strong earners
Many strategists think unprofitable tech stocks and crypto – which soared over the last two years thanks in large part thanks to Fed and government stimulus – are likely to struggle as the central bank turns off the money taps.
"The massive amount of savings created by working-from-home stimulus found its way into the most speculative of risk assets including meme stocks and bitcoin," said Peter Cecchini, Axonic Capital's director of research, in a note this week.
"Both of those have taken considerable breathers, and we believe it will only get worse as margin leverage begins to evaporate on higher financing costs."
Even those strategists who think stocks overall will fare relatively well this year say the more speculative corners of the market are likely to stay in trouble. As rates rise and inflation stays hot, investors will be looking towards stocks that can deliver strong earnings.
"Liquidity will be less than it has been for the past two years," Barclays strategist Emmanuel Cau told Insider.
"If you invest in the market today, you want to do it on fundamentals," he said. "You want to buy you to own the part of the market… which have earnings basically as the key drivers."