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Bitcoin Price Trends in the Hands of the Federal Reserve
Recent analysis from European digital asset manager CoinShares suggests that following the decline of Bitcoin ETF hype, the price trajectory of the leading cryptocurrency is once again influenced by the actions of the Federal Reserve. CoinShares Head of Research, James Butterfill, pointed out the increasing alignment of Bitcoin’s price movements with the broader interest rate conversation, particularly as reflected in interest rate expectations for June. This trend was previously observed in 2023 as well.
The market sentiment, as indicated by CME Fedwatch, indicates a certainty of flat interest rates in June, with potential drops only anticipated in Q4. Core PCE inflation, the Federal Reserve’s preferred metric which excludes food and fuel, has remained stubbornly high at 2.8% in March. Conversely, GDP growth figures have been lackluster, showing only 1.6% growth in Q1 of 2024 compared to the previous quarter’s 3.4%.
Further data reveals contraction in the manufacturing sector and a stall in services, fostering concerns of stagflation and increasing expectations for the central bank to maintain higher rates for an extended period. In response to these concerns, Bitcoin’s price dipped below $57,000 leading up to the Federal Reserve’s May meeting.
Despite maintaining the policy rate above 5.25%, the Federal Reserve surprised with a “dovish” announcement of plans to taper quantitative tightening (QT) by $25 billion per month instead of the previous rate of $60 billion. This slower reduction of the economy’s dollar supply is seen as positive for Bitcoin and other risk assets, traditionally thriving in environments of easy monetary policy.
Following this announcement, Bitcoin’s price rebounded above $60,000, with analysts likening the Fed’s strategy to applying brakes while simultaneously accelerating. The gradual QT tapering indicates a shift in the Fed’s approach as it potentially reaches the limit in paying off short-duration debt. Butterfill predicts a rate cut later in the year in response to poor economic indicators, suggesting that this delayed action may exceed market expectations.
With Bitcoin’s inherent fixed supply and high immutability, Butterfill anticipates that a future rate cut by the Federal Reserve could serve as a support for Bitcoin prices in the face of ongoing economic uncertainties.
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