EuroEasy Research Institute: With global hawkish central banks about to raise interest rates, will Bitcoin be in trouble or rise against the trend?

The first week of February 2022 was not peaceful.

On February 4, European Central Bank President Christine Lagarde no longer ruled out raising interest rates this year, moving closer to the tightening stance of central banks around the world. Officials privately expect to adjust policy guidance as early as next month.

Just minutes before the ECB's policy decision, the Bank of England raised its benchmark interest rate by 25 basis points to 0.5%, less than two months after its last increase of 15 basis points.

In fact, the inflation rate in major countries and regions around the world has reached a point where the brakes must be applied: the euro zone's consumer price index (CPI) rose 5.1% in January, exceeding economists' expectations, marking the largest increase in at least 20 years and more than twice the European Central Bank's 2% target; the UK's CPI in November and December hit a 10-year high and a historical high of 5.4% respectively, setting a new record for the fastest growth in 30 years; the United States even set a 39-year record with an inflation rate of 7%.

Two-year bond yields have risen sharply this year as central banks have taken a hawkish stance. Data source: Bloomberg

As early as December 15, 2021, the Federal Reserve announced that it would reduce its monthly purchases of U.S. Treasury bonds and mortgage-backed securities (MBS) by $30 billion (originally planned to reduce by $15 billion per month), twice the previous amount. Based on this, the asset purchase plan is expected to end at the beginning of next year instead of in the middle of the year. It is also expected to raise interest rates three times in 2022 to control the pace of inflation.

Everyone tried to step on the brakes, but the results were not satisfactory.

After the wave of interest rate hikes, US stocks have fallen sharply, with the S&P 500 index falling 11% from high to low in 14 days. Goldman Sachs directly warned the Federal Reserve for the first time: If the tightening policy causes a "hard landing" of the economy, the United States may face an economic recession.

S&P 500 plunges 11% in 14 days

The Bank of Canada, which is trying to curb high housing prices caused by inflation, unexpectedly announced that it would not raise the benchmark interest rate for the time being. The reason is still the high-sounding "due to the uncertainty brought to the economy by the new wave of epidemics", but Canada's federal banking regulator has previously warned that raising interest rates may cause housing prices to plummet by more than 20%.

BlackRock, the world's largest asset management company, directly asserted that global interest rate hikes are more noise than action: "We believe that despite the tough rhetoric from central banks, they will eventually admit that fighting inflation by raising interest rates sharply will impose too high a cost on economic growth. That is why we believe the ultimate policy response will be mild."

It turns out that the resistance to global central bank policy shifts is far greater than investors expected.

In contrast, the crypto asset market experienced a decline before an increase around the Spring Festival this year. After rising for five consecutive days, the price of Bitcoin has reached $45,000, and Ethereum has returned to $3,200.

After falling below $33,000, the price of Bitcoin is approaching the $45,000 mark again. Data from EuroEasy

The phenomenon of the crypto asset market being “independent” from the monetary and financial markets has not gone unnoticed. On February 8, the U.S. SEC solicited public feedback on Bitcoin ETFs and whether Bitcoin itself is susceptible to manipulation and fraud.

In fact, although the interest rate hike policies of major central banks around the world have had an impact on the crypto asset market, there is still considerable resistance to a decisive and drastic policy shift.

According to the current market, the value potential of Bitcoin is far from reaching the critical point, and the long bull trend is beyond doubt.

After the change, track selection will become the key.

According to public media data, more than $800 million in venture capital has poured into the cryptocurrency field in the past week.

Facts show that after the market bottomed out, cryptocurrencies have ushered in a new round of bottom-fishing, bringing an upward momentum. The decline in the market has also brought new entry opportunities, and more funds and users have taken advantage of this opportunity to enter the cryptocurrency market. Glassnode's weekly report on the chain shows that the number of non-zero wallets has reached a record high and has not been affected by the previous decline.

The number of non-zero Bitcoin wallets hits a new high. Data source: Glassnode

The era of monetary easing dominated by the US dollar will sooner or later come to an end. By then, the flow of funds may bring about a reshuffle, and there will be a period of opportunity for re-selection of tracks.

Careful selection and decisive decision-making are always the most important weapons for investors .