Cryptos Price In Larger Rate Hikes And Faster Balance Sheet Runoff By Fed

Cryptocurrencies extended losses early on Thursday amidst minutes of the discussions at the Federal Reserve’s March meeting indicating a tolerance for larger rate hikes and more rapid Balance Sheet reduction. The minutes released on Wednesday showed that multiple members of the Fed were comfortable with one or more 50-basis points rate increases and a monthly balance sheet runoff of close to $95 billion, commencing as early as May. Crypto market capitalization dropped to $2.02 trillion, from $2.07 trillion early on Wednesday.

The minutes showed all participants agreeing that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017-19 period.

The anxiety in financial markets regarding the Fed’s Balance Sheet runoff or quantitative tightening is largely on account of the impact it would have on interest rates. As liquidity available in the system shrinks, the cost of capital would invariably increase. The opportunity cost of holding non-interest bearing and low-interest bearing assets would increase. Which explains why equities and cryptocurrencies have witnessed price corrections and bond yields have increased in response to the runoff news.

Wall Street ended with losses on Wednesday, with the Nasdaq Composite shedding more than 2 percent. Asian equities on Thursday tracked the Wall Street lower. European bourses have however resisted the negative sentiment.

The Dollar has remained firm, with the Dollar Index opening at 99.65 and currently trading near 99.5, after touching a fresh 52-week high of 99.82.

Bitcoin dropped 2.7 percent overnight to trade at $43,725.45. BTC is down more than 7 percent in the past week. Bitcoin had dropped to a low of $42,899.91 in the past 24 hours.

Ethereum too slid 1.9 percent to trade near $3,250. ETH is down almost 5 percent in the past 7 days.

Bitcoin’s dominance stood at 41.2 percent, while that of Ethereum was 19.4 percent.
At current levels of market capitalization, Bitcoin (BTC), Ethereum (ETH), BNB (BNB), Solana (SOL), XRP (XRP), Terra (LUNA), Cardano (ADA), Avalanche (AVAX), Polkadot (DOT), Dogecoin (DOGE), TerraUSD (UST), Polygon (MATIC), NEAR Protocol (NEAR), Litecoin (LTC) and Cosmos (ATOM) are the top-ranking crypto coins.

Between Monday and now, XRP (XRP), Terra (LUNA) and Litecoin (LTC) have improved rankings by a notch each. However, Cardano (ADA) dropped two notches and Cosmos (ATOM) slid one notch.

In the tokens category, Tether (USDT), USD Coin (USDC), Binance USD (BUSD), SHIBA INU (SHIB), Wrapped Bitcoin (WBTC), Cronos (CRO), Dai (DAI), Chainlink (LINK), Uniswap (UNI), FTX Token (FTT), UNUS SED LEO (LEO), Decentraland (MANA), The SandBox (SAND), Axie Infinity (AXS) and THORChain (RUNE) rank in the order of market capitalization.

Compared to the position as on Monday, there are no change in the rankings except for Chainlink (LINK) and Uniswap (UNI) that have exchanged rankings.

The Fed would undoubtedly be wary of the turbulence that its Balance Sheet runoff can cause to the financial markets, which is why it is letting its thinking on the matter be made known in advance. As asset valuations take cognizance of this looming eventuality, there would invariably be a repositioning, driven by the risk-return tradeoff. Crypto markets too have to calibrate to this repositioning, sooner rather than later.

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