On March 20th, Fed Chairman Jerome Powell gave a speech as part of the Fed’s regular FOMC meeting. In the speech, the chairman raised the Fed's target for both GDP and PCE inflation, while at the same time saying that they still expect 75 basis points of reduction to the fed funds rate by the end of 2024. This confusing rhetoric seemed to alter the market's belief in the path of rates and the Fed's perception of the economic condition. Either the Fed has implicitly changed its target for acceptable inflation, from 2% to something significantly higher, or they foresee major challenges on the horizon. Both possibilities seemed to put a bid into dollar alternatives like gold and bitcoin. At the time of the speech, bitcoin was trading near $62,000. In the days following the speech bitcoin rallied 16% up to a high of $72,000 on March 31st.  Of course, bitcoin buoyancy could be attributed to the quickly approaching “halving”, scheduled for late April, but when viewed relative to gold’s 5% move higher in the identical timeframe, it's reasonable to think that rate policy is at the heart of the move. 

Over the past two days, bitcoin lost over 8% of its value. apparently in response to a higher-than-expected ISM number that pushed short term rates higher. In recent months, it appeared that bitcoin was immune to higher rates but as U.S. two-year yields threaten to make new three-month highs, the risk is that the inverse correlation between rates and bitcoin may reemerge.

The consensus seems to be that the Fed is dovish, and, more importantly, they may be more dovish than the current situation dictates. Several key economic indicators are approaching that could easily change the market's prediction for Fed policy. On April 5, we see the latest read of the unemployment situation and on April 10th, we see CPI. What bitcoin wants to see are numbers that won't dissuade the Fed from its plan to ease rates. In other words, data that comes in much higher than expected, in either release, could be a headwind for further gains in bitcoin. 

Around April 21st, bitcoin will experience its fourth "halving". The last halving, in 2020, saw an over 40% rally in bitcoin in the three weeks preceding the event. These crosscurrents influencing bitcoin have the potential to cause massive volatility in the weeks to come. Currently, bitcoin's realized volatility has risen to 60%, ten percentage points higher than the number two coin, Ethereum, which usually has a higher volatility than bitcoin. Also, bitcoin's dominance within the crypto space continues to grow while Ethereum falls. Bitcoin now makes up 52% of the total crypto market cap, up from 45% in a year, while Ethereum sits at 16%, down from 18.5% in the same period. Perhaps the relative strength in bitcoin is due to the new bitcoin ETF or perhaps it's due to the halving. Whatever the cause, traders will anxiously await news regarding the potential launch of the Ethereum ETF in hopes that it will have a similar level of success as bitcoin and potentially gain back some of its lost market share. 

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Financial Advice Disclaimer: Nothing in this article constitutes professional or financial advice, performance data or any recommendation that any specific cryptocurrency, portfolio, index, investment product, transaction or investment strategy is suitable for any specific person. You assume the sole responsibility of evaluating the merits and risks associated with all financial decisions and should seek the advice of a registered financial advisor when in doubt.