Ethereum’s native token, Ether, plunged sharply after the United States Federal Reserve published the minutes from its December meeting. This showed that the Fed is looking to a quicker timetable for raising interest rates in 2022.
Minutes showed that the Federal Open Market Committee was in favor of raising short term rates sooner or faster than participants had anticipated. According to CME Group, there was a two-thirds chance of the first increase in March.
After the minutes were published, Ether dropped by more than 13.50% to $3,300. The crypto market saw similar downturns, with Bitcoin (BTC), dropping by just over 9% to almost $42,100.
Four-hour chart of the USD/ETH exchange rate. Source: TradingView
After the Fed’s announcement, ETH/USD suffered more losses than BTC/USD.
It seems traders chose to dewind tokens that were sitting on better long-term profits than Bitcoin. Ether’s returns over the past 12 months, even after the Fed-led drop, were around 175%. Bitcoin’s profits in the same time period were close to 15.75%.
Performance of the top 15 cryptocurrency coins. Source: Messari
Similar to Bitcoin, Ether’s main rival, Solana, (SOL) also suffered more losses than Bitcoin. Its profits plunged by more than 13.75% following the Fed’s announcement. However, its 12-month profits were more than 7,500%. This indicates that the market may need to make further corrections if it continues to favor bears.
Key rebound level for ETH/BTC
According to performance of ETH/BTC’s most traded instrument, Ether plunged against Bitcoin over the past 24 hours.
The pair fell by just over 5% to reach 0.077 BTC. It also reached a crucial support level of 0.078 BTC, which has been instrumental in keeping Ether bullish on Bitcoin and limiting its downside bias.
ETH/BTC daily chart showing its support level. Source: TradingView
The 0.078-BTC support was also seen to be the lower trendline for Ether’s descending triangular. Descending triangles, which are continuation patterns, tend to send the price back in the same direction as its previous trend after a consolidation period.
This increases Ether’s ability to outperform Bitcoin over the long-term, provided it breaks through the triangle’s upper trendline and has convincingly larger volumes.
Too soon to be afraid of the Fed
Fed officials held firm to their belief that the U.S. experienced higher inflation because of supply-chain bottlenecks for months. Chairman Jerome Powell said that the Fed would solve the problem by itself. But in the latest meeting, he showed less conviction toward the so-called “inflation-is-transitory” narrative.
This is due to the U.S. Consumer Price Index reaching a nearly 40 year high in November 2021, at 6.8% year-over. Core consumer prices, which exclude food and energy, increased by 4.7% in November 2021, surpassing the Fed’s inflation target of 2.2%.
Powell stated that there is a real danger now that inflation may be more persistent. He also said that the risk of higher inflation becoming entrenched had increased after the FOMC meeting ended on December 15.
Over the years, U.S. headline inflation has increased. Source: Bloomberg, Bureau of Labor Statistics
Madison Faller, global strategist at JPMorgan Private Bank, stated to Bloomberg that investors shouldn’t fear the Fed. She noted that its three rate cuts in 2022 will do little to curb consumer prices. She stated:
“Growth will slow down and inflation will remain at historical trend levels through 2022. This will reduce the risk of a Fed-induced material market correction.
Cointelegraph reported that mainstream investors have been tempted to invest in crypto because of the possibility of higher inflation. This, in turn, can devalue cash.
Thomas Peterffy, the billionaire founder and CEO of Interactive Brokers Group Inc., said that he has 2% to 3% of his net assets in cryptocurrency in case fiat money “goes into hell”. Ray Dalio, founder of Bridgewater Associates, also revealed last year that Bitcoin was part of his investment portfolio.
The outlook against inflation promised some relief to Ether, which tends t tail Bitcoin’s price movements.
Fundstrat Global strategists Sean Farrell, and Will McEvoy noted that investors should invest more in smart contracts to reap the benefits of the next market rebound.
“Given current macro background, leverage within Bitcoin market and recent robustness in the altcoin markets, we believe it’s appropriate for us to be overweight Ethereum” they wrote in a note.
We would probably not place a bet on Bitcoin in the near-term, but we believe there is a way to go long volatility using derivatives strategies. You should do your research before making any investment or trading decision.