Bitcoin and ether have an interesting setup heading into the Federal Reserve’s latest policy announcement Wednesday, and Bernstein is watching closely for what the next rate increase (or lack of one) will do to crypto prices. The Fed is due to conclude its two-day meeting and unveil its latest policy decision at 2 p.m. ET. Most of the market expects the central bank will raise interest rates by another 25 basis points. Others anticipate there will be no hike. Bitcoin is up 22% this month, according to Coin Metrics, and more than 70% for the year. Between the 2023 rally and a recent break in its correlation to stocks — which is lower than it has been in the past two years — bitcoin is behaving more and more like in “the pre-2020 days of Crypto, where it traded as a ‘safe haven’ and ‘risk-off’ asset,” Bernstein analysts Gautam Chhugani and Manas Agrawal said in a note Wednesday. “We see crypto closer to its non-sovereign, decentralised roots and a safe-haven asset, in case of any fragility with the banking and financial economy,” they added. “That is a mental model that has started to show some evidence in recent correlation data.” Still, inflation and Fed rate hikes remain the biggest catalysts for bitcoin. Here are three scenarios Chhugani and Agrawal are watching, and what investors how investors could expect to see prices react. 1. The Fed raises rates another 25 basis points “Crypto does sell off in this event (little profit booking given strong last few weeks), but not by much because such a move further hurts the banking system,” they said. “A weaker banking system which will need an eventual massive intervention by the Fed, is bullish for crypto because it reinforces the case for 1. a decentralized ‘store of value’ money that cannot be devalued by a central bank (Both BTC and ETH) and 2. a case for decentralized financial systems that can be transparent, swift and robust in this fast, social digital age of bank runs and allows users to maintain control of their funds through self-custody,” they added. 2. The Fed pauses its rate hikes – ‘maybe temporarily’ The analysts called this scenario a “double-edged sword” because, while it could make investors worried about the gravity of the banking crisis, they could also interpret the move as a temporary one that would allow for more stability among the banks before the Fed resumes its inflation fight. There “may be immediate positive impulse for the crypto markets, but definitely, markets would wait to see what more is to come out of the banking situation,” Chhugani and Agrawal said. 3. The Fed reduces rate hikes by 25/50 basis points The analysts said this scenario is unlikely, noting that, while it would be “the right thing to do” to stabilize the banks, it would also change the narrative on the inflation fight. “Crypto markets may rally on the immediate risk-on impulse, and it may vindicate some who have been saying the Fed reversed course, after breaking the banks,” they said. “But any near term crypto rally would find it hard to sustain growth if crypto simply pivots to a risk on trade.” “We have a different view here, that risk-on low interest rate markets are not good for crypto since they promote more gambling and nefarious use cases,” they added. — CNBC’s Michael Bloom contributed reporting.
