OKLink: The Federal Reserve highlights a hawkish stance, will the crypto market come to a halt?
The cryptocurrency market has integrated into the global financial cycle.Author: Hedy Bi, OKLink Research Institute
Recently, the market generally expects a shift in the U.S. tightening monetary policy, and Federal Reserve Chairman Jerome Powell's statements over the past weekend have once again introduced uncertainty into this expectation. Powell stated that the Federal Reserve may have more work to do in combating high inflation. "The Federal Open Market Committee (FOMC) is committed to achieving a sufficiently restrictive monetary policy stance to bring inflation down to 2% over time; we are not confident that we have achieved this."
In recent days, the market has been digesting "hawkish news." From the perspective of monetary policy regulation, if the Federal Reserve continues to raise interest rates, the direct impact will be to increase dollar interest rates, making dollar assets more attractive. Meanwhile, the price of Bitcoin has declined after reaching a peak on November 10.
As the world's primary foreign exchange reserve currency and the dominant position of the U.S. in the global economy, along with many assets being denominated in dollars, the Federal Reserve wields significant influence in global financial markets, especially as overseas developed countries respond to Fed policies in a manner highly similar to U.S. stock markets. However, inconsistencies within the Federal Reserve regarding strategy led to market misjudgments during the period from June to August this year. Some market participants mistakenly believed that the Federal Reserve had reached the peak of the interest rate hike cycle, resulting in a significant rebound in risk markets.
With institutional entry and regulatory support, the cryptocurrency market, including Bitcoin, will become increasingly significant. So, what is the correlation between Bitcoin and the Federal Reserve? Does this "niche market" still possess its unique hedging characteristics?
On-chain and off-chain connectivity, the crypto market is more sensitive
As niche assets, cryptocurrencies like Bitcoin have become increasingly correlated with financial markets such as the S&P 500 and global developed country stock markets since 2020. We can see that the correlation with major global stock markets (Equity F) has changed from 0 to 0.25, only slightly lower than the S&P 500's correlation of 0.29. In terms of financial factors (Financials F), the correlation has shifted from -0.03 to 0.19.
According to estimates from an IMF working paper, the impact of U.S. monetary policy on cryptocurrency cycles is nearly identical to its impact on global stock cycles, which sharply contrasts with the potential of crypto assets in hedging market risks. When the Federal Reserve's monetary policy rate (SFFR) rises by one percentage point, the cryptocurrency factor declines approximately 150% more than the stock factor over the subsequent 15 days, indicating that the crypto market is more sensitive to changes in the Federal Reserve's monetary policy.
However, investors should note that there is currently a divergence between the market and the Federal Reserve. The market generally believes that the U.S. is at the peak of the economic cycle or in a normal inflation phase. However, while the Federal Reserve has previously insisted that the U.S. is facing a peak in the economic cycle or normal inflation, its actual actions and measures have been more aggressive. Therefore, the market has developed some doubts about the Federal Reserve's "inconsistent" stance.
Whether it is the frequent positive developments from regulatory support and institutional acceptance or the conclusions drawn from data, it is clear that the on-chain crypto market is no longer niche. The crypto market has integrated into the global financial cycle.
Institutional entry impacts, crypto investors need a macro perspective
As institutional funds flow into the crypto market, the market's maturity will increase. At the same time, professional investors tend to pay more attention to macroeconomic factors and changes in monetary policy. The increased participation of institutional investors strengthens the transmission effect of monetary policy on the cryptocurrency market, thereby amplifying the impact of the Federal Reserve's monetary policy on the market.
Arthur Hayes pointed out in his latest article "Bad Gurl" that a bull market in crypto may arrive with an increase in dollar liquidity, which is directly related to the dollar's monetary policy. Therefore, predicting from the perspective of the real economy and the global financial cycle, especially anticipating the actions of the Federal Reserve, managing "market expectations" will become one of the most important metrics for future market investors.
In addition to the "inconsistent" stance of the Federal Reserve creating doubts in the market, we also need to pay attention to the external effectiveness of the Federal Reserve's monetary policy. Investors need to have a broader macro perspective, such as referencing the dynamics of the real economic cycle and the broader context of global financial operations. Considering factors like the relative decline of the dollar's international status, the internationalization process of the renminbi, and the lack of a significant advantage of the U.S. GDP scale compared to the overall EU, scholars like Professor Scott Sumner have discussed the disproportionate impact of U.S. monetary policy on the world nominal economy, proposing the distinction between "nominal superpower" and "real superpower."
Cryptocurrencies like Bitcoin are entering a new phase. With the participation of various key stakeholders, from institutional investors to regulatory bodies, the crypto market is accumulating scale and influence at an unprecedented rate. Meanwhile, its price trends seem increasingly difficult to remain independent. In the short to medium term, even if the crypto market is supported by technology, independent trends have become a thing of the past. Compared to stock market investors, crypto investors also need to pay attention to the trends in monetary policy under the multiple challenges of inflation, financial stability, and economic recovery from a more macro perspective.
