He Who Should Not Have an Impact on Crypto

In a perfect world, crypto wouldn’t be influenced by fiat-based monetary policy, and Jerome Powell, chair of the U.S. Federal Reserve, wouldn’t be one of the most influential people in the industry. But as proven by the latest crypto meltdown, Powell has driven the market narrative more often than not in 2022.

Four-decade-high inflation has been the focus of economic policy leaders around the globe this year. That has been particularly true of Powell and his colleagues at the Fed’s Federal Open Market Committee (FOMC), the body that has raised interest rates at a rapid pace since March, from near-zero levels to the current 3.5% to 4%.

The economic uncertainty is one of many reasons crypto assets have suffered heavy losses this year. Bitcoin (BTC), the largest crypto by market capitalization, is down 65% year to date. On average, bitcoin moved 4% on days where the Fed raised interest rates.

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The total value of crypto assets is 62% lower than at the beginning of the year, when the asset class was valued at $2.2 trillion.

“Jerome Powell belongs on any list of cryptocurrency influencers given his position as chairman of the Federal Reserve,” said Howard Greenberg, educator at Prosper Trading Academy. “All financial markets, including cryptocurrencies, are impacted by the Fed's rate hikes.”

The fact that cryptocurrencies are thus affected causes chagrin for the crypto industry’s biggest advocates. Bitcoin, because of its capped total, is supposed to be immune to inflation and any Federal Reserve action.

For the first half of this year, before the crypto industry took a big hit from the failure of a number of crypto companies, including lender Celsius Network, Three Arrows Capital and most recently, FTX, bitcoin was directly correlated with both the S&P 500 and the Nasdaq 100 stock indexes, which are both strongly affected by inflation. According to traders, this was because institutional investors were increasingly buying bitcoin and trading it as they would stocks.

Though the correlation has since weakened, macroeconomic uncertainty is likely persist into next year. Fed officials have signaled further rate hikes are coming in 2023. Dashing the hopes of bitcoin maximalists and crypto believers, Powell’s impact on crypto assets will continue.