Investing.com – For much of 2021, the Federal Reserve and the U.S. government have blamed “temporary” supply chain bottlenecks affected by the pandemic for higher prices. This view has been criticized by many critics, who believe that the Fed has caused the highest inflationary pressures in the United States in more than 40 years. While the administration has described inflation as “transient” for political reasons, it is inexcusable for the politically neutral Fed.
In late 2021, FOMC members found that inflation was more structural than temporary, but the Fed continued to choose to sit on the sidelines in responding to price increases. Quantitative easing will not end until early March 2022, and the federal funds rate will not be raised from 0% until the March 2022 meeting. At the same time, in March 2022, the Fed and the Fed were already well behind the inflation curve, rising to 8.5% and 11.2%, respectively, their highest levels in 40 years. How will cryptocurrencies respond to rising U.S. interest rates?
Uncharted territory for cryptocurrencies
Many cryptocurrency market proponents believe the asset class is a hedge against inflation. Economic conditions can erode the value of fiat currency, as the U.S. government can issue fiat currency at will, expanding the money supply. While the supply of cryptocurrencies is limited to mining and other activities, cryptocurrencies have the potential to become an alternative to fiat currency as the supply of traditional currencies increases to stimulate the economy.
Inflation started rising in the second half of 2020 and expanded in 2021. As inflation rises, the Federal Reserve’s monetary policy begins to lag far behind the inflation curve, with the leading cryptocurrency reaching a record high on November 10, 2021.
The chart above shows a peak of $68,906.48 on November 10, 2021.
On the same day, the price reached a record high of $4,865.426. Since then, the price of the leading cryptocurrency started lower and reached its most recent low on January 24, 2022.
This week, the Fed raised interest rates by 50 basis points and will begin a plan to shrink its balance sheet in June. As the Fed grapples with rising inflation, the price of cryptocurrencies remains near the lows of Jan. 24, rather than the highs of Nov. 10, 2021.
The role of cryptocurrencies in fighting inflation has not yet appeared
In 2020, the Federal Reserve released a large amount of liquidity and the large-scale stimulus plan of the US government has laid hidden dangers for high inflation. These hidden dangers sprouted in the second half of 2020 and gradually bloomed in 2021 and 2022. The Fed is currently tackling inflation, but the Ukraine conflict adds another problem to the economy.
Commodity prices have recently pulled back from multi-year highs (or even new all-time highs), but are still closer to highs than lows. So, the movements of Bitcoin, Ethereum, and many other cryptocurrencies tell us that either the Fed will have a significant impact on inflation, or they are not an inflation hedge.
So far, cryptocurrencies have not been the inflation barometer many had hoped, but they are dealing with a rising interest rate environment as prices remain subdued compared to their mid-November 2021 highs.
Buffett is not bullish on cryptocurrencies
Cryptocurrencies are still a rapidly growing asset class that is moving towards the mainstream, but they still lack the massive liquidity of stocks, bonds, traditional currencies or commodity markets. In addition, there are many who refuse to recognize their value and utility as assets.
At Berkshire Hathaway’s annual meeting over the weekend, the prominent investor Warren Buffett said:
“If you told me you owned all the bitcoins in the world and sold me for $25, I wouldn’t take it because what could I do with it? I’d have to sell it back to you anyway, Because it can’t do anything.”
Buffett does not consider Bitcoin or other cryptocurrencies to be productive assets. His partner, Charlie Munger, was more blunt:
“In my life, I try to avoid stupid, evil, and things that make me look worse than everyone else, and Bitcoin does all three.”
Munger thinks Bitcoin is stupid, it still has the potential to go to zero, it is evil because it undermines the Fed’s system.
In response, Elon Musk sarcastically tweeted:
“Haha, he said Bitcoin many times.”
The debate between proponents and critics over the future of the crypto asset class is raging. One of the key goals of cryptocurrency growth is to create a liquid and transparent forward curve to set future value.
U.S. regulators do not support cryptocurrency lending, a key factor in creating future value. While CME has launched options on mini bitcoin and ethereum futures, the forward curve remains illiquid, limiting the growth of this asset class.
Regulators say allowing cryptocurrency lending will increase the illicit use of the financial instrument. But more likely, as Munger put it, “Cryptocurrencies undermined the Federal Reserve System,” as cryptocurrencies sought to wrest control of the money supply from the U.S. government and give it back to individuals.
Regulatory hurdles are the front lines of the war between traditional financial interests and cryptocurrencies, and the weapons regulators use to destroy cryptocurrencies.
Without precedent in history, cryptocurrency volatility will increase
While rising inflation and higher interest rates may affect the value of cryptocurrencies, there is no historical data to draw from. Because this asset class is only 12 years old and has yet to go through a full economic cycle. Furthermore, active trading and investing in cryptocurrencies has only existed for 5 years since the introduction of Bitcoin futures on the Chicago Mercantile Exchange increased market liquidity. The forward curve goes a long way to boost liquidity further, but the war between critics and proponents may continue to hinder the transition of crypto assets to mainstream assets.
Cryptocurrencies remain highly speculative financial products with the potential to be tools that threaten the status quo. Traditional financial institutions and governments will continue to erect barriers, and cryptocurrency proponents and speculators will find ways to circumvent them. There are a lot of price differences expected in the market that create historical precedents every day, but rarely can be used as a justification for price movements. The impact of rising U.S. interest rates on the asset class is still unknown, and it will take months, if not years, to model the potential correlations.
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[This article is from Yingwei Caiqing Investing.com, to read more, please log on to cn.investing.com or download Yingwei Caiqing App]