Bitcoin, ethereum and other major cryptocurrencies have suffered an almighty price crash this year, wiping around $2 trillion from the combined crypto market—with the Biden administration putting traders on notice.
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The bitcoin price, down 70% from its all-time high set late last year, has repeatedly failed to hold ground above $20,000 per bitcoin while the ethereum price has crashed following a stark warning from the U.S. Securities and Exchange Commission (SEC) chairman Gary Gensler.
Now, the bitcoin, ethereum and crypto market is braced for the Federal Reserve to unleash a “sledgehammer” that could further tank prices (though some remain hopeful of a turnaround) in its ongoing war against stubbonly high inflation—with one analyst predicting the fallout could be worse the 2008 Great Financial Crisis.
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“We have to turn over to the macro big picture and what’s been pressuring cryptos this year and that is the Fed sledgehammer,” Bloomberg Intelligence senior commodity analyst Mike McGlone told Kitko.
The Fed, led by chairman Jerome Powell, has this year embarked on a program of historic interest rate hikes as it grapples with soaring inflation thats rocketed to a 40-year high.
Last week, the August inflation report showed prices were continuing to run higher than expected, potentially forcing the Fed into another big rate hike at its meeting this week. The Fed’s Federal Open Market Committee will announce its latest decision on Wednesday with markets predicting a 75 basis-point rise, which would take interest rates to over 4%—a level not seen since pre-2008.
Bitcoin, ethereum, other major cryptocurrencies and stock markets have been hard hit by the Fed’s monetary tightening mission this year, designed to suck liquidity out of the system, with high-growth tech stocks and crypto leading markets lower.
“There has been a fresh bout of anxiety on financial markets amid worries that inflation is still proving to be a formidable opponent to take down,” Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown, said via email.
“Crypto assets still highly entwined with the fortunes of the equity markets and given that they are seen as highly risky assets, there has been a flight away from the crypto Wild West as investors search for less turbulent places to put their money.”
The Fed and other central banks pumped cash into the financial system during the Covid-19 pandemic, inflating prices across the board, and if the Fed’s interest rate hikes trigger a recession and a market meltdown, McGlone fears it’s out of dry powder.
“I think it’s going to be worse than the 2008 correction, worse than the Great Financial Crisis,” McGlone said, adding: “The Fed started easing in 2007, and then they added massive liquidity. They cannot do that anymore.”
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However, McGlone went on to predict the bitcoin price could rebound to hit a fresh all-time high of $100,000 by 2025 and remains bullish on ethereum long-term, pointing to the potential for institutional adoption.
For now, the bitcoin price has dropped to recent lows of just under $20,000 over the last week, with some fearful a further fall is on the way.
“Despite a pause in the sell-off, the technical balance of power is on the bears’ side, with the potential to renew the June lows and move into the $12,000-$14,000 per bitcoin area,” Alex Kuptsikevich, FxPro senior market analyst, said in emailed comments.