The current market cycle has seen an unprecedented correlation between Bitcoin, cryptocurrencies, and US stocks, particularly the Nasdaq. Simply relying on past crypto market cycles may no longer be effective. Instead, it's more insightful to examine historical patterns of how US equities have reacted to Federal Reserve rate hikes.
On March 16, the Federal Reserve announced a 25 basis point rate increase, aligning with market expectations. Risk assets, including cryptocurrencies, generally experienced a rebound. Optimism spread throughout the crypto space, partly stimulated by the LUNA Foundation's decision to purchase Bitcoin as a reserve asset. Many investors began expressing optimism about second-quarter performance, though some cautioned about potential pressure in May. Expectations of a 50 basis point hike and the start of balance sheet reduction (quantitative tightening) that month could be reflected in market prices ahead of time. Recent pullbacks, occurring after short-term buying from LUNA was exhausted and amid MicroStrategy's further抵押-backed purchases, might indicate market caution.
Whether prices are rising or falling, macro factors like interest rate hikes and balance sheet reduction have become primary considerations for judging cryptocurrency market trends. Given the high correlation between crypto and equities, it's natural to look back at how the stock market reacted during previous Fed tightening cycles to gauge potential outcomes this time. While history doesn't repeat exactly, it offers valuable lessons.
According to data from Western Securities, the US has undergone six rate-hike cycles since the 1980s.
During these periods, global equity markets haven't performed too poorly.
Looking specifically at US stock indices, performance was relatively strong during the two hiking cycles in the 1980s and the 2015-2018 cycle. Although returns were slightly negative during the 1994-1995 period, the decline was modest. In other cycles, performance was largely flat.
Additionally, data from Guosheng Securities indicates that US stocks mostly declined within the first one to three months after the initial rate hike but typically resumed rising after three months.
Current market expectations suggest seven rate increases in 2022, followed by three to four more in 2023, with a pause in 2024. Balance sheet reduction could begin as soon as May. If the Fed raises rates seven times this year, that implies a hike at every Federal Open Market Committee (FOMC) meeting, most likely by 25 basis points each time. Upcoming FOMC meeting dates are: May 4, June 15, July 27, September 21, November 2, and December 14.
It's important to note that this analysis assumes a bullish perspective—that the crypto market will find a bottom during this tightening cycle and that it's unlikely to see the extreme drawdowns (80-90%) typical of past bear markets.
Part of this confidence stems from continued strong activity in venture capital funding. Despite macro pressure from rising rates, smart money remains cautious about secondary markets but is still actively flowing into primary markets to back industry projects. This indicates underlying confidence in the sector's long-term growth.
According to Dove Metrics, as of April 6 this year, there were 58 venture capital fundraisings in the crypto industry, totaling nearly $12 billion in funds raised.
During the same period, there were 579 project funding rounds, with total financing reaching nearly $16 billion.
These figures help gauge smart money movement in private markets. For public markets, one can refer to weekly institutional flow reports, such as those from Coinshares. It's worth noting, however, that such data reflects the previous week's flows and may lag real-time conditions.
Based on the above, from a bullish viewpoint, one might cautiously infer:
During a rate-hike cycle, one to three months after the first increase might present a good buying opportunity. Since the first hike occurred on March 16, this suggests a potential opportunity window between April 16 and June 16. This interval includes two FOMC meetings. If any meeting results in a larger-than-expected hike (say, 50 basis points), could the ensuing market panic offer a favorable entry point?
It is crucial to state that this article only considers one data dimension—market performance during past rate-hike cycles—to infer potential trends. The market is a complex system influenced by numerous interrelated factors. A single data point should only be one of many inputs for informed decision-making.
Note: None of the opinions here constitute investment advice.
Frequently Asked Questions
How do Fed rate hikes usually affect risk assets like stocks and crypto?
Historically, risk assets often face short-term pressure immediately following a rate increase due to higher borrowing costs and potential reduced liquidity. However, over a longer horizon, if the economy remains healthy, markets can adapt and resume upward trends.
Why is there such a strong correlation between crypto and US equities now?
The increasing institutional participation in crypto markets has brought in investment behaviors and macro sensitivities similar to those seen in traditional tech stocks. Many investors now treat Bitcoin and major cryptocurrencies as risk-on assets, much like growth stocks.
What does 'balance sheet reduction' mean, and how does it impact markets?
Balance sheet reduction, or quantitative tightening (QT), is when the Fed reduces its holdings of Treasury and mortgage-backed securities. This removes liquidity from the financial system, potentially raising long-term interest rates and tightening monetary conditions, which can be a headwind for asset prices.
Can historical Fed cycles really predict crypto market behavior?
While history provides useful context, it is not a perfect predictor. Crypto is a newer asset class with unique drivers, including regulatory changes and technological shifts. Historical equity patterns can be informative but should be combined with crypto-specific analysis.
What are some signs that the crypto market is forming a bottom?
Indicators may include sustained high levels of venture funding, decreased leverage in the system, long-term holders accumulating supply, and volatility settling down. Fundamental on-chain metrics and institutional flow data can provide additional clues.
Where can I learn more about current macro conditions and their market impact?
Staying informed through reputable financial news sources and market analysis is key. For those looking to dive deeper into data and strategies, explore more market analysis tools that provide real-time insights and historical comparisons.