Viewpoint: From a historical perspective, is the impact of the Fed’s interest rate hike on cryptocurrencies really a disaster?

In this cycle, the close connection between Bitcoin, cryptocurrencies, U.S. stocks and Nasdaq is unprecedented. The rigid adherence to past cryptocurrency cycles may no longer work. What we should pay more attention to is the historical relationship between the Fed's interest rate hikes and the U.S. stock market.

On March 16, the Federal Reserve officially announced a 25 basis point rate hike, which was in line with market expectations. Risk markets generally started to catch up. Stimulated by the LUNA Foundation's purchase of Bitcoin as a reserve, the currency circle gradually became optimistic. Investors continued to be optimistic about the Q2 market, but some investors also said that they might face pressure in May. The expectation of a 50 basis point rate hike and balance sheet reduction in May will almost certainly be reflected in the market in advance. With the short-term funds for LUNA's purchase of coins exhausted and the micro-strategy's mortgage re-purchase, the recent market has retreated a lot, which may also be a manifestation of cautious funds.

It seems that regardless of the market ups and downs, macroeconomic factors such as interest rate hikes and balance sheet reduction have become the main considerations for judging the current cryptocurrency market. At the same time, against the background of high correlation between the cryptocurrency circle and the stock market, we may naturally think that we can look back and learn from the stock market's reaction in historical interest rate hike cycles to guess the possible market reaction in this round of interest rate hike cycle. Although history will not simply repeat itself, it is also worth reviewing for reference.

According to statistics from Western Securities, the United States has experienced six rounds of interest rate hikes since the 1980s:

During these interest rate hike cycles, the performance of global stock markets is actually not that pessimistic.

If we look at the performance of US stock indices alone, we can see that they performed well in the two rounds of interest rate hikes in the 1980s and the 2015-2018 interest rate hike cycle. Although they were negative during the 1994-1994 period, they were only slightly negative returns. In the other two cycles, the performance was basically flat.

In addition, according to statistics from Guosheng Securities, U.S. stocks mostly fell 1-3 months after the first interest rate hike, but mostly rose again 3 months later.

At present, the market expects that there will be 7 rate hikes in 2022, 3-4 more rate hikes in 2023, and no rate hikes in 2024. At the same time, the balance sheet reduction will start as early as May. If there are 7 rate hikes this year, then every future FOMC meeting will raise interest rates by 25 basis points. The next FOMC meetings will be at 0504, 0615, 0727, 0921, 1102, and 1214.

It should be noted that our premise here is based on the perspective of the bulls. In other words, we tend to believe that the cryptocurrency market will bottom out in this round of interest rate hikes, and there is a high probability that the maximum retracement in the previous bear market (80%~90%) will not occur again.

Part of the confidence may come from the enthusiasm for investment and financing in the primary market. Under the pressure of macro interest rate hikes, hot money/smart money has little preference for the secondary market, but it still actively flows into the primary market to bet on industry projects, which is essentially a positive outlook for the long-term development of the industry.

According to Dove Metrics data, as of April 6 this year, there have been 58 venture capital fund fundraising events in the cryptocurrency industry, with a total fundraising amount of nearly US$12 billion.

As of April 6 this year, there have been a total of 579 project financing events in the cryptocurrency industry, with a total financing amount of nearly US$16 billion.

This is a way to observe the movement of smart money in the primary market, and for the secondary market, we can also refer to Coinshares' weekly institutional fund flow report. However, it is worth noting that this statistic reflects the fund flow of the previous week, so there is a certain time delay.

Based on the above conclusions, if we start from the perspective of the bulls, we may be able to arbitrarily draw the following inference:

During the interest rate hike cycle, 1 to 3 months after the first rate hike, you may be able to wait for a good buying opportunity. March 16 is the first rate hike of this round, so the reference buying time range is 0416 ~ 0616, which includes two FOMC meetings. If an FOMC meeting has an unexpected rate hike (such as 50 basis points), then is the market panic at that time a good buying opportunity?

Finally, it should be stated that this article only infers the potential trends of this round from the single data dimension of market trends during the interest rate hike cycle. The market is like a chaotic system, driven by the mutual influence of many factors. A single data dimension can only serve as one of the factors to assist decision-making.

Note: All views in this article do not constitute investment advice.

References

https://pdf.dfcfw.com/pdf/H3AP2022032815555254451.pdf?1648500780000.pdf

https://pdf.dfcfw.com/pdf/H3_AP202201241542311710_1.pdf?1643041805000.pdf