Bitcoin Slips to 3-Week Low as Market Sees Federal Reserve Lifting Rates to 5.65%

The fed funds futures show traders pricing in a higher-for-longer interest rates mantra by the Fed.

AccessTimeIconMar 8, 2023 at 8:25 a.m. UTC
Updated Mar 8, 2023 at 3:52 p.m. UTC

Bitcoin fell to a three-week low Wednesday as U.S. Federal Reserve Chairman Jerome Powell's hawkish testimony to Congress spurred traders to price in a higher "terminal rate."

The leading cryptocurrency by market value fell to $21,871 during Asian trading hours, a three-week low, CoinDesk data show. Ether, the second-largest cryptocurrency, nearly tested Tuesday's low of $1,535.

Powell on Tuesday said the central bank is likely to raise rates more than previously expected, warning that the process of pushing inflation down to the 2% target has a "long way to go." Since last year the Fed has raised rates by 450 basis points (bps), roiling risk assets, including cryptocurrencies.

In response to Powell's hawkish comments, traders of the fed funds futures lifted their forecasts for the peak or terminal rate to 5.65% from around 5.47% early this week and 4.9% a month ago. In other words, traders now expect continued tightening over the coming months, with the central bank raising rates by at least 100 basis points before calling it a day.

A closer look at the fed funds futures reveals that traders have been pricing a "higher for longer interest rates" approach by the Fed. The fed funds futures are derivative contracts widely used by traders to express their view of where the official interest rate will be at the time of the expiration of the contract.

As seen in the feature image, currently, October futures represent the terminal rate, implying a peak borrowing cost of 5.65%. A month ago, June futures represented the peak rate of 4.9%.

"You can see the peak in the curve is in the October contract now. Last week it was the September contract. It's a reflection of the higher for longer trend," Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk.

If that's not enough, the market now sees a 70% probability of the Fed raising rates by 50 basis points later this month, a reacceleration of tightening after a brief step down 25 bps in February. The yield on the two-year Treasury note, which is sensitive to interest rate expectations, has crossed above 5% for the first time since 2007 and could rise further toward 5.655, considering the terminal rate pricing.

Rising rates/yields dent the appeal of risk assets and could make it difficult for bitcoin to sustain the current valuations, as QCP Capital noted. The Singapore-based trading firm said last month that bitcoin is yet to see the last leg of the bear market that could see prices revisit, if not break below the November low of $15,480

Some observers, however, don't see rising yields leading to a big sell-off in risk assets.

"I don't see equities and crypto as being very vulnerable to a selloff anymore as there has been so much derisking and deleveraging already," Geo Chen, macro trader and author of the popular Substack-based newsletter, Fidenza Macro, told CoinDesk. "My long-term bias is that risk assets will trend higher once we return back to a disinflation regime. However, this could take a few months."

Ilan Solot, co-head of digital assets at Marex Solutions, voiced a similar opinion, saying most institutional speculators, who would want to short futures (take leveraged bearish bets) on the market amid rising yields, have been "de-platformed."

"Even if their models are flashing short it!, there're fewer options to trade securely and with capital efficiency. FTX is gone. Binance is under siege. Coinbase is great for spot, but they don't offer derivatives. Not every fund can access the CME. Deribit is domiciled in Panama," Solot said in an email.

Solot added that short-term institutional investors appear to play a lesser role in price discovery while bullish investors operating only through crypto wallet Ledger, MetaMask or social media platform Twitter have more say in price determination.

UPDATE (March 8, 2023 12:51 UTC): Adds comments from Marex's Ilan Solot.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.