- Bitcoin followed stocks into the red yesterday after the Federal Reserve showed its hand
- The Fed plans to steadily increase interest rates as well as engaging in quantitative tightening
- Weak stocks and a strong dollar could scupper Bitcoin’s chances of a recovery in 2022
Bitcoin has followed the stock market into a sharp reverse following news that the Federal Reserve plans to start quantitative tightening as well as raising interest rates on a continual basis. After a brief rally, stock markets by the biggest margins since 2020, taking Bitcoin with it and leaving 2022 looking like a potentially dark year for all risk-on markets.
Markets Experience Bloodiest Day Since 2020
Bitcoin followed the stock market in responding bullishly to the Federal Reserve meeting expectations with a 0.5% interest rate rise, and it appeared that the rise had been priced in. However, this bounce was quickly eviscerated:
The move leaves Bitcoin hovering above an area of support that needs to hold if hopes for a rally in the near future are to persist:
The fact is however that Bitcoin is now in the thrall of institutional investors and is entangled in the performance of the stock market, which has taken a battering since the Covid boom ended and free money started drying up. This has been reflected in the performance of the tech-heavy NASDAQ:
The NASDAQ itself is at a crucial point – if it falls further and closes the week under this area of support then it’s goodnight Vienna for both it and very probably Bitcoin too. The same pattern is repeated in the likes of the S&P 500 and the Dow Jones Index. With the Federal Reserve promising to raise interest rates further and begin quantitative tightening, news of which caused the collapse in the first place, this could well be a reality.
Strong Dollar Worsens Outlook
All eyes, too, are on the U.S. Dollar Index to which Bitcoin is typically inversely correlated. The DXY is currently sitting at a resistance level dating back to 2017 but shows little sign that it wants to correct:
Given that the Federal Reserve’s actions are going to positively impact its intrinsic value, there is every chance that this rally could continue, putting more pressure on Bitcoin for the coming months.
The prospect of Bitcoin and stocks taking a beating together is something we discussed back in January, and it looks like it could come to pass.
