The US federal reserve is forecasted to hike interest rates by almost 0.75% before the end of 2022. The intended increase will come after the apex bank aggressively dials back its bond buying. These moves signal the Fed’s intention to gradually end policies introduced at the start of the global pandemic.
With 2022 now almost upon us, investors continue to speculate on the effect of the new policies on financial markets. Going by past events, it is believed that high-risk assets and stocks will fall, with Bitcoin probably following suit. However, possibilities exist where Bitcoin bucks the trend.
General Market Consensus on Bitcoin and Interest Rate Hikes in 2022
The current belief is that high growth equities, and other assets, will drop off when the Fed’s interest rate hikes occur. It is widely accepted that high-risk investments have an inverse relationship with increasing interest rates.
The relationship between tech stocks and treasury yields have also played out over time to give credence to this notion. When yields rise, risky assets fall off and vice versa.
A clear example of this is seen in market analyst Caleb Frazens tweet. He highlights the correlation between Nasdaq-100 Futures and 10-year Treasury yields, as seen in the chart below. This historical precedent supports analysts’ current consensus about the market’s reaction in 2022.
Another pointer to the possibility of a fall-off is seen in the dot-com bubble of the mid-90s to early 2000s. The dot-com bubble was a rapid rise in U.S. technology stock equity valuations fueled by investments in internet-based companies.
The value of equity markets grew exponentially during this period, with the Nasdaq index rising from under 1,000 to more than 5,000. The bubble eventually burst between 2001 and 2002, and a bear market ensued.
The Federal Reserve hiked interest rates throughout the bubble until the burst, which saw drastic measures employed. Concerning the current market situation, strategist and investor Keith Rabois suggests the Fed’s influence on the internet bubble is being neglected. He opines that the planned hike would lead to a market collapse.
Rabois’ sentiments are supported by several analysts who understand interest rates and their relationship with risk assets. They believe that history may just repeat itself in the coming year.
Bitcoin, however, seems to be immune to this trend despite being seen as a high-risk asset. Its price from historical data appears to move in sync with treasury yields. According to Franzen, the correlation between the crypto asset and the 10-year treasury yield is direct. This suggests that it is acting as a hedge against inflation.
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Possible Reasons Why Bitcoin Bucks The Trend
Several opinions have been put forward as the likely reason Bitcoin may not follow the historical trends mentioned. Crypto analyst and investor Anthony Pompliano highlighted that most investors now see Bitcoin as a safe haven asset.
This view sees them interact with the foremost cryptocurrency as a reserve currency. They see low-cost funding as a way to borrow money and make investments that will yield them more Bitcoin. If interest rates rise, risk assets will sell off, and these investors will return to Bitcoin, their safe haven asset.
Another reason may lie in the Bitcoin halving event. Although some analysts believe that this may have lost its effect as a market catalyst, the historical impact should not be discarded. The Bitcoin Stock-to-flow (S2F) model shows a correlation between the halving event and price hikes. So far, the last two halvings have served as catalysts for bull runs. With the last halving occurring in 2020, 2022 may fall well within the range of a market boom.
In the end, no one knows how the planned interest rates hike will affect the markets in 2022. Also, how individual assets like Bitcoin will react is unknown. However, for now, the key factors will revolve around the relationships between rate hikes and high-risk investments, along with Bitcoin and treasury yields.
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