Bitcoin (BTC) has remained relatively steady at around $28,600 on the Bitstamp exchange following the recent announcement that the US Federal Reserve would be raising interest rates by 25 basis points. This incremental rate hike indicates that further tightening may be possible, with financial analysts speculating that there could be one more 25 basis point rate hike this year. The Fed’s statement on the latest rate hike implies that further tightening may be necessary, but most Fed governors and reserve bank presidents still believe they are just one hike away from the terminal rate.
The Fed’s decision to raise interest rates is potentially a sign of economic recovery following the COVID-19 pandemic. The consensus among Fed policymakers is that the economy is growing at an acceptable pace, with recent indicators pointing to modest growth in spending and production, and job gains running at a robust pace. Low unemployment rates are also a factor contributing to the optimistic outlook on the economy.
However, inflation remains elevated, and the Committee remains highly attentive to inflation risks. Inflation fears continue to linger after the Fed recently raised its inflation forecast to 3.4% for the year, up from its previous 2.4% forecast. The Fed’s monetary policy is widely viewed as an instrument for controlling inflation, so it’s not surprising that the committee is highly attuned to any inflation risks as they attempt to balance inflationary pressures with economic growth.
One of the measures the Fed has taken to control inflation is continuing to let $95 billion of assets, $60 billion of Treasuries, and $35 billion of MBS, roll off each month. This approach is meant to counterbalance the emergency lending facilities, which are supportive of the economy, but not considered a problem at this stage. The Fed’s balance sheet side of things provides a window into how the central bank is managing its reserves and controlling inflation to promote economic growth.
Meanwhile, Bitcoin has continued its volatile path, with the price hovering around $28,000 – $30,000, a far cry from the record-high $64,000 seen earlier this year. The unpredictability of Bitcoin is a reflection of its decentralized nature and the fact that it is not subject to the same regulatory oversight as traditional financial instruments. However, the volatility of Bitcoin also presents opportunities for investors looking to buy low and sell high, and for Bitcoin holders looking to capitalize on market movements.
Historically, Bitcoin has had a rocky relationship with the traditional financial system, with traditional investors expressing skepticism about Bitcoin’s legitimacy as a financial instrument. However, recent years have seen a shift in sentiment, with more and more traditional institutions starting to embrace Bitcoin as an asset class. This shift in attitude has been driven, in part, by the growing recognition of Bitcoin’s unique properties, including its decentralized nature, its limited supply, and its immunity to inflationary pressures.
The recent adoption of Bitcoin by traditional financial institutions has helped to legitimize Bitcoin as an asset class and may have contributed to the relative stability of Bitcoin’s price compared to its volatility in the past. However, as with any asset class, there is always the potential for volatility, especially in the ever-changing regulatory environment facing Bitcoin.
Despite the uncertainty surrounding Bitcoin and the wider cryptocurrency market, the adoption of Bitcoin by traditional financial institutions is expected to continue, albeit at a slower pace. As more investors enter the market and more institutions embrace cryptocurrency as an asset class, the regulatory environment for Bitcoin is likely to become clearer, which in turn may help to stabilize its price.
In conclusion, the recent interest rate hike by the US Federal Reserve is a sign of economic recovery following the COVID-19 pandemic. The Fed’s monetary policy is focused on maintaining low inflation while promoting economic growth, with possible further tightening to come. Meanwhile, Bitcoin’s volatile nature continues to present opportunities for investors, despite its uncertain regulatory environment. The growing adoption of Bitcoin by traditional financial institutions bodes well for its long-term legitimacy as an asset class, although its future trajectory remains uncertain.
