Market Update: Challenges Continue to Persist for Crypto Investors

Written by Robert Lynch
on March 11, 2022
Market Update: Challenges continue to persist for crypto investors

The challenging period for crypto investors persists. The macro backdrop of rising inflation has weakened the argument that bitcoin provides a credible hedge against higher prices, at least based on the price action in recent months.

One factor likely restraining bitcoin is the move by global central banks to begin to remove the abundant amounts of liquidity they have injected since the covid epidemic began two years ago. In that regard, the FOMC meeting on March 15-16 is widely expected to see the Fed’s first interest rate hike this cycle, increasing the Fed funds rate by 25bp, and formally conclude its bond buying program which has seen its balance sheet more than double to $8.8 trln from pre-covid levels.

To the extent that abundant central bank liquidity has been an important support for bitcoin (and a host of other financial and real assets), the start of the withdrawal has and can continue to create headwinds to crypto.

This all takes place against the newer backdrop of the war in eastern Europe. The events have boosted volatility in financial assets broadly, including bitcoin and other crypto. Interestingly, since the start of Russia’s invasion of Ukraine on February 24, bitcoin has actually appreciated 1.7% versus a 2.8% decline in the NASDAQ Composite Index over that same time. Some have attributed this to bitcoin demand specifically associated with the war, including transactions in Russia to avoid western sanctions as well as global efforts to support Ukraine via bitcoin donations.

Evidence on that front thus far suggests modest but perhaps not unimportant flows from those sources.

Beyond that, bitcoin’s relative resilience may also support the notion that it can serve as a store of value in stressed or crisis situations. At the very least, US/Western government efforts to cut off Russia’s access to the US dollar and global funding/liquidity markets have raised a discussion about using fiat currencies as a weapon… including ways in which those actions could influence investor’s decisions to hold fiat currencies in the future, and the alternatives that could substitute.

Suffice to say that developments in the war, including the international response, will remain an obvious focus for crypto investors.

This past week the Biden Administration announced an executive order on crypto currencies. The announcement amounted to a kind of blueprint on how the federal government will approach and coordinate their efforts on the space.

The efforts will focus on consumer protection, financial stability, illicit uses, US leadership in the global financial sector, financial inclusion and responsible innovation. Importantly, the order did not contain any obvious attempt at restrictions or other potential negatives for the crypto space.

That outcome initially met with some gains in bitcoin given concerns that the possible use of bitcoin to skirt Russia/Ukraine related sanctions could have encouraged US authorities to take action that might have curbed crypto’s use or appeal.

Robert Lynch

Robert Lynch

Head of Research and Strategy | Robert Lynch is an experienced financial market strategist, focusing on macro markets including currencies, interest rates, commodities and cryptocurrencies. He is trained and practiced in the analysis of economic developments, monetary and fiscal policy, political events and technical indicators in order to generate actionable investment solutions.