Cryptos Extend Losses Ahead of Fed, ECB Announcements

The risk-off sentiment in markets is here to stay, analysts say


Blockworks exclusive art by axel rangel


key takeaways

  • European Central Bank holds rare unscheduled meeting as market conditions worsen
  • S&P and Nasdaq hold steady while BTC and ETH fall ahead of interest rate announcement

The pullback in crypto markets continued Wednesday as firms cut staff while investors assess the damage from Celsius’ withdrawal halt and the apparent insolvency of longtime digital assets hedge fund firm Three Arrows Capital. 

The Federal Reserve is slated to announce an expected 0.75 percentage point interest rate hike Wednesday afternoon following the end of its two-day policy meeting. The European Central Bank, which was not scheduled to meet, issued a statement saying it would “apply flexibility” going forward to combat increasingly turbulent markets. 

“It’s become very clear that central banks are going to have to be very aggressive in countering mounting price pressures around the globe and that the probability of recessions has increased,” Craig Erlam, senior market analyst at OANDA, wrote in a note Wednesday. “Stagflation is not yet here but the risks around it have risen considerably in recent months which makes central bank responses all the more critical.” 

Many more rate hikes will be demanded in the short term to get a degree of control over runaway inflation, Erlam said — and markets are not reacting well. 

Bitcoin inched lower toward $20,000 early Wednesday while ethereum slid closer to $1,000. The tech-heavy Nasdaq and the S&P 500 were both trading slightly higher ahead of Fed Chair Jerome Powell’s press conference, signaling the market has largely priced in a 75-point hike, according to Erlam. 

“There is still a huge gap between nominal rates and real rates, so there is much more room for the Fed and other central banks to hike in the months to come,” said Mikkel Morch, executive director at digital asset hedge fund ARK36. “Investors can’t realistically expect risk assets to have a more sustained uptrend until the Fed pivots.”

The risk-off sentiment is likely not going to dissolve anytime soon, in Erlam’s estimation. 

“Risk appetite has been obliterated and the days of ultra-low rates are behind us, there isn’t the same speculative mood that existed when bitcoin was exploding higher,” Erlam said. “There may still be a belief that bitcoin can thrive in the future but something that offers little now beyond speculative rallies is going to continue to struggle. Especially when we’re seeing headlines like those around Celsius and Binance.”

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