The crypto market remains volatile after the June 14 Federal Open Market Committee (FOMC) announcement and presser with Fed Chairman Jerome Powell revealed that the central bank would pause rate hikes for June.
While this move aligned with investors’ expectations, the crypto market has yet to show any bullish momentum. Powell also mentioned that at least two more rate hikes would be needed in the future.
Bitcoin price started the day up, trading above $26,000, but it has since retraced to a 24-hour low of $25,791 after the FOMC announcement. Some analysts are predicting that a drop to $25,000 is inevitable based on the current state of BTC derivatives data.
The muted crypto price action and lack of a bullish response to today’s rate hike pause could be the lingering effect of the SEC’s charges against Binance and Coinbase exchange.
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FOMC tanks crypto and some equities
The stock market dropped sharply on June 14 after the FOMC decision with the Dow dropping 200 points minutes after the announcement. Another major equity index, the S&P 500 hit a 13-month high.
While Powell decided to pause interest rate hikes, the Federal Reserve reiterated the focus to bring down elevated inflation.
In the policy issuance, the Federal Reserve stated,
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The wording shows a potential return to interest rate hikes in the future. To date, crypto prices are still highly correlated with the Dow and S&P 500 and most major banks still expect the U.S. to experience a sharp recession at some point in 2023. This has not stopped major stock indices from reaching yearly highs after the United States debt ceiling deal.
According to U.S. Bank analysis which incorporates more than 1,000 data points, investor sentiment about the current state of the economy remains low.
According to Robert Haworth, Senior Investment Strategy Director at U.S. Bank,
“Overall, the U.S. economy is slowing, but not reaching recession.”
The pausing of rate hikes is causing volatility across equities and cryptocurrencies.
Crypto sector regulation is still the main threat
Regulation has been a constant in the recent cryptocurrency news cycle. While the EU unveiled a digital asset framework, MiCA, the United States seems intent to regulate through SEC enforcement.
On June 5 and June 6, the United States Securities and Exchange Commission filed civil lawsuits against two of the largest centralized exchanges in crypto, Binance and Coinbase. The SEC claims that 61 different cryptocurrencies, representing $100 billion in value, are securities.
One of the 61 crypto tokens listed was Algorand (ALGO), a token that in 2019, Gensler called a “great technology” which seems to contradict this latest enforcement action.
Other top crypto tokens specifically mentioned as securities include Binance USD (BUSD), Binance Coin (BNB), Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), The Sandbox (SAND), Decentraland (MANA), Axie Infinity (AXS) and COTI.
The recent SEC action adds to a long history of disputes, misconceptions or mistrust over the actual use case of digital assets. After the FTX implosion, some feel U.S. lawmakers are angry with the crypto industry. The most recent battle is centered on how centralized exchanges can use customer funds.
Not all lawmakers are comfortable with Gensler’s actions. United States Rep. Warren Davidson (OH) introduced the “SEC Stabilization Act” into the House of Representatives on June 12. The bill would remove Gensler as Chair and redistribute power amongst a committee.
TVL and volume remain low
The attack on centralized exchanges has also increased Bitcoin exchange inflow and outflow. Exchange inflows indicate increased sell-side pressure while outflows are typical to self-custody assets.
Despite the netflow movement to on-chain self-custody, DeFi has not witnessed growth. The total value locked metric (TVL) is a common way to examine the health and sentiment of the crypto market. According to DeFiLlama, TVL across all protocols dropped 0.5% in the past 24-hours and shed $120 billion since April 5, 2022.
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With heavy macro headwinds, upcoming rate hikes and low volume, it is likely the volatility in crypto will remain for the foreseeable future.
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