The crypto prices are in a major rut and a bear market ensues. Bitcoin fell below the $20,000 mark and is currently trading at $19,848. BTC prices have gone down by 5% in the last 7 days. A successful merge was not enough to rally Ethereum prices. ETH has fallen below the $1,500 mark.
The crypto market cap has fallen close to 3% in the last 24 hours and is well below the $1 Trillion mark. The crypto bear market is a direct result of the Fed’s hawkish stance to combat inflation.
According to a Bloomberg survey of economists, the interest rates will keep peaking well into 2023.
How Interest Rates Are Creating Crypto Bear Market
The crypto market became increasingly correlated to the general market in 2020. It behaves extremely like tech stocks and the tech-oriented NASDAQ. Therefore, macroeconomic conditions play a major role in the crypto market. In June 2022, the Fed raised the interest rate by an unprecedented 75 bps. As a result, the crypto market suffered a major liquidity crisis.
According to Bloomberg’s survey, the Fed will raise the interest rates above 4% or 400 bps by the end of this year. The current target rate is 225-250 bps. To reach 400 bps, the Fed will need two successive jumbo hikes of 75 bps. The market is also pricing in the possibility of a 100 bps hike.
The survey is very much in line with the statements made by key Fed officials. Cleveland Fed President Loretta Mester highlighted the need to raise interest rates above 4%. According to economists, a pivot from the Fed is not likely before 2024. The Fed’s aggressive stance will not be helped by the fact that the Consumer Price Index for August shows worse-than-expected inflation.
Will Elon Musk’s Deflation Warning Come True
Elon Musk believes that another significant hike from the Fed will tip the economy to deflation. As the CPI data from August has bolstered the Fed’s stance, it is important to see whether an almost certain interest rate hike can create deflation-type conditions.