This day last week, Ethereum completed the biggest software upgrade in the history of cryptocurrency as the Merge finally took place. It all came and went smoothly without a hitch, exactly how it was written up.
In the week since, Ethereum has lost 12% of its value.
Jerome Powell moves the market
It shows that not even an event as huge as the Merge is enough to overcome what is really controlling markets: the macro situation. And by macro situation, I mean how Jerome Powell and the Federal Reserve are reacting to it.
The Fed has announced yet another rate hike of 75 bps, largely spurred on by the disappointing inflation reading last week. The message to the market now is very clear: interest rate hikes will continue thick and fast until inflation is curtailed.
And if there was any doubt before, there certainly is none now: cryptocurrency will follow these interest rate rises.
Why are interest rates controlling crypto prices?
Crypto remains as high-risk as you can get. The further out on the risk spectrum you go, the more volatile the moves are – both upward and downward.
The Fed raising rates makes it more expensive to borrow and invest, hence serving to pull liquidity out of the economy. This slows down inflation while also threatening a recession, which is the tightrope that the Fed are trying to walk.
Stocks have fallen in response to this, especially high growth and tech stocks, which traditionally have their cash flow into the future discounted more. If these discount rates are rising, the value of companies today are lower, and hence the share price falls.
For crypto, despite many narratives about inflation hedges, it is not there yet. The correlation between the stock market and crypto is sky-high, and the two have moved in tandem.
What does the future hold?
I have written about this a lot recently. While I believe in Bitcoin long-term, there is no getting around the fact that in the short-term, the price action is macro-driven.
Personally, I am very negative about the direction of the economy and think that the winter could be really ugly. If that prognosis comes true, Bitcoin will follow the rest of the market down.
In crises, correlations go to one as there is a flight to quality across the board. Investors sell risky assets and flock to safe-haven assets. This is part of the reason why the dollar is so strong, as it is seen as the safest of all safe haven assets.
It’s a pattern we have seen again and again in previous recessionary periods. For crypto, this is the first macro downturn it has experienced in its short history. And right now, even with positive events such as the Merge, the wider movements of the economy are the only thing that matters for the price action of crypto.