Bitcoin (BTC) lost a key price support after the minutes of the Federal Reserve's July meeting dashed hopes that looser monetary policy is set to return to the U.S. next year.
The leading cryptocurrency by market value fell by more than 2% on Wednesday, dropping below a bullish trendline drawn from July 15 and July 26 lows. The breakdown sparked concerns of a deeper sell-off on social media.
Fed minutes released late Wednesday showed policymakers discussed the need to continue raising interest rates to keep borrowing costs at levels that restrict U.S. economic growth for long enough to tame inflation. The cryptocurrency is sensitive to changes in Fed policy and has halved in value since the central bank kicked off its tightening cycle in March.
The push for continued rate hikes and restrictive policy contradicts recent market pricing, which had indicated expectations of interest rate cuts in 2023 and lifted bitcoin to a two-month high of $25,203. The surprise may also inject volatility into markets.
"It seems reasonable that increasing and elevated rates are headwinds for bitcoin," said Lewis Harland, a researcher at Decentral Park Capital. "The Fed appears to keep consistent in their inflation north star and the cost seems like an economic contraction."
Traders of Fed fund futures no longer see the central bank switching to rate cuts next year, according to Mott Capital Management's Michael Kramer. Traders expect rates to peak around 3.7% by March and remain there until late 2023. Last month, the central bank raised the benchmark interest rate by 75 basis points (0.75 percentage point), lifting it to the 2.25%-2.5% range.
While the tightening may end next year, as traders predict, the timing of renewed liquidity easing is unclear. That could cap the upside in risk assets.
"The liquidity contraction is still underway. The Fed's remarks in the minutes of its July meeting indicated that the liquidity contraction may end in 2023, but the timing of the re-addition of liquidity is unknown," Griffin Ardern, a volatility trader from crypto asset management firm Blofin, said.
"The Fed rate hike in September and the uncertainty about by the [Ethereum] Merge [stemming from the possibility of a blockchain split] will further suppress investors' bullish expectations," Ardern said.
Some observers, including former Fed trader Joseph Wang, read the minutes as somewhat less hawkish because the transcript revealed concerns about overdoing tightening to contain inflation. The also said policymakers judged it would be appropriate to slow rate hikes at some point. It remains to be seen if markets agree with Wang's assessment and reverse Wednesday's losses.
Bitcoin traded near $23,500 at press time, indicating a slight recovery from Wednesday's low of $23,180. However, the cryptocurrency remains well below the former-support-turned-resistance level of the rising trendline.