Cryptocurrencies were mostly lower on Wednesday despite a brief 3% jump in bitcoin after the U.S. Federal Reserve maintained accommodative monetary policy.
But the gains were short-lived as risk assets pulled back, with traders focusing on Fed officials’ revised projection for interest rate increases by the end of 2023 – sooner than what was anticipated in March.
The Fed also increased estimates of coming inflation to 3% from the 2.2% projection in March, largely due to transitory factors
“The upgraded economic forecasts still support an argument that the Fed could announce a progress-dependent tapering plan at the end of summer, with actual tapering starting in January,” wrote Edward Moya, senior market analyst at Oanda, in an email to CoinDesk.
Moya expects risk assets, including cryptocurrencies, to see some short-term pressure due to worrisome signs over inflation. Rising prices could result in sooner-than-expected Fed tapering.
The S&P 500, gold, copper and platinum prices dropped as U.S. Treasury 10-year yields rose above 1.5%.
Traders had more to grapple with than the Fed’s expectations for an earlier interest rate rise. Crypto markets continue to face pressure from regulators, and it’s not just related to China.
Members of the U.S. House of Representatives have formed a task force to discuss a range of crypto topics, aiming to “engage with regulators and experts to do a deep dive into this poorly understood and minimally regulated industry,” according to U.S. Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee.
And in South Korea, exchanges have halted trading on certain cryptocurrencies as regulatory pressure mounts. The latest move follows an ongoing regulatory crackdown on crypto trading, which included fines imposed on exchange employees caught trading on their own platforms.
Regulatory crackdowns could weigh on crypto prices and keep financial advisors on the sidelines.
In fact, more than 90% of independent financial advisers surveyed by Opinium would not recommend investing in crypto or meme stocks.
For now, traders continue to make long/short bets; on one side balancing regulatory uncertainty, while on the other being attuned to an accommodative macro backdrop that has rewarded risk assets over the past few years.
Elevated hedging costs
In the bitcoin options market, hedging costs remain elevated, indicating that fear caused by the May sell-off has not fully dissipated.
The chart below represents the three-month bitcoin options premia for put contracts with strikes at 80% of the spot price, based on data provided by Skew. The current hedging level is still higher than the May low, which preceded a near 30% price sell-off.
A similar dynamic is seen in the one-week put-call skew, which measures the spread between prices of short-term puts and calls. The put-call skew has drifted from a near 20% high in May but remains elevated relative to prior months.
Options data suggests traders are not overly complacent given the lack of a decisive price breakout from a month-long range.
Bitcoin hashrate decline
The Bitcoin hashrate – the total computational power used to secure transactions on the blockchain – has dropped to its lowest level since November, possibly a reflection of China’s recent crackdown on cryptocurrency mining amid concerns over the network’s energy consumption.
The seven-day average hashrate slid to 129.1 million exahashes per second on Tuesday, well off the all-time high of 180.6 million exahashes per second in mid-May, according to data from Glassnode. It’s still up from 105.6 million a year ago.
However, some analysts predict the drop in the Bitcoin hashrate will be reversed eventually, as some miners leave China for other locales.
“Zooming out, the size and rate of the latest decrease is consistent with other previous drops,” wrote Zack Voell, content director at Compass Mining. “After machines shuffle around the map and hashpower relocates to new regions, the steady growth of Bitcoin’s hashrate should resume.”