The world's largest cryptocurrency has been engulfed by a broader stock market sell-off, with Bitcoin now sensitive to many macro factors, including the long-awaited Federal Reserve meeting today, Wednesday, followed by a press conference by Fed Chairman Jerome Powell.
The COVID pandemic has forever changed the composition of Bitcoin investors, so now the correlation of cryptocurrencies with technology stocks is at an all-time high and it will not go back.
This large-scale institutional implementation has led to Bitcoin becoming a reflection of risky assets. And that is why it has decreased by more than 18% since the beginning of the year.
According to Ben McMillan, founder and CIO of IDX Digital Assets: As institutional adoption continued to grow, Bitcoin's correlation with the stock market also grew. After 2020, it has been consistently positive, and now it is at an all-time high. And this is a direct function of only institutional dollars flowing into the space. The days of negative or zero correlation with stocks are over.
And the involvement of institutions means frequent rebalancing, so Bitcoin has become sensitive to stocks and larger macroeconomic factors, including changes in the monetary policy of the Federal Reserve.
Also, as markets expected hawkish Fed sentiment to be very aggressive, with forecasts of sharp rate hikes in May, June, and even July, Bitcoin fell faster than stocks.The crypto space grew in value very quickly in the most hawkish scenario of the Federal Reserve System, including a rate hike and a forecast of a reduction in the balance sheet.Here's what bitcoin will react to when it comes to the Fed:
Since most of the aggressive policy has already been taken into account in prices, the cryptocurrency market will be most sensitive to the Fed's reduction schedule, that is, to the speed at which the Fed will reduce its balance sheet by $ 9 trillion.
The market will be looking for more hints on the reduction schedule. And when inflation peaks, it all depends on the Fed's actions. And will there be a recession in 2023?
A key comment that could be a catalyst for Bitcoin's rally is some dovish surprise - whether in terms of the inflation forecast, rate hikes, or a declining schedule.
