A temperature check on crypto as market eyes potential end of rate hiking cycle

Key Takeaways

• The Federal Reserve increased interest rates 0.25% Wednesday, but the market is anticipating the hiking cycle is coming to a close
• Optimism is flowing in crypto markets, which saw crushing losses in 2022 as rates rose swiftly
• While the Fed has said it no longer forecasts a recession, this could be a double-edged sword for crypto
• Fed may be reluctant to cut rates, instead electing to for the higher for longer approach, something which could restrain crypto
• Employment is at half-century lows, wage pressure remains and core inflation has been stickier than the headline number
• Overall, macro environment is far brighter than nine months ago, but caution may be prudent for crypto investors despite market-wide sentiment spiking rapidly

Following the latest 25 bps increase to the federal funds rate Wednesday, which was widely anticipated ahead of time by the market, the most important interest rate in the economy is now a remarkable 525 bps above where it was prior to March 2022, when the Fed first hiked rates.

Finally, after a relentless liquidity squeeze, the market is anticipating that the end of the road may be nigh. For Bitcoin investors, this is music to their ears. Or at least that is what many in the sector are currently proclaiming. The only thing is, the true story may be a bit more convoluted. 

Bitcoin has moved with yield expectations

Firstly, it is unquestioned that the transition to a higher yield environment has been a death wish for crypto. As inflation became rampant last year and we transitioned to a new paradigm of tight monetary policy after a decade of essentially-free money, digital assets were crushed. Liquidity was sucked out of the entire system, hurting assets which reside on the long end of the risk spectrum the most. And that is certainly where crypto has set up shop in its brief existence thus far. 

The below chart shows this as well as any. Plotting the two-year treasury yield, which moves with rate expectations, on an inverted axis against the Bitcoin price shows how much the latter has dipped in line with the rise in yields. And we know that where Bitcoin goes, crypto tends to follow. 

The optimism being spouted about now is centred on the hope that much-coveted rate cuts are imminent. Yet there is reason to believe that this may still be premature, for a number of reasons. The bulk…