Bitcoin Recovers Over $21K as Fed Commits to Slow Inflation; Traders Remain Cautious

Bitcoin BTC$89,207.50 rose above $21,000 in European hours today as broader financial markets in Europe and Asia advanced after Friday’s open.

The recovery followed a record nine-day slide that caused the bitcoin price to fall from $31,000 in early June to just over $20,000. Bitcoin has slumped almost 70% from a November's lifetime high of over $69,000.

Among equity markets, Hong Kong’s Hang Sang rose 1.1%, the Shanghai Composite added nearly 1%, Germany’s DAX gained 1.41% and the Stoxx Europe 600 advanced 1.22%. U.S. index futures also gained.

The recovery in markets came as traders assessed the long-term impact made by Wednesday's U.S. Federal Reserve decision to raise interest rates. Fed Chair Jerome Powell said the agency remained committed to bringing down inflation and increased interest rates by 75 basis points, causing a brief relief rally in global and crypto markets.

“Although a 50 basis point hike was anticipated for many weeks, last Friday’s inflation data forced the market to price in a more aggressive hike with huge sell pressure,” Marcus Sotiriou, an analyst at crypto broker GlobalBlock, said in an email. “Therefore, a 75 bp hike was priced in for the short-term leading to a rally.”

Sotiriou, however, added that there could be more downside in the next few months after this week’s rally cools.

“This is due to concerns around an earnings recession on the horizon, as a result of the Federal Reserve’s aggressive monetary policy. According to Bank of America, stagflation fears are the highest since 2008, and profit outlooks are the worst since the GFC (Global Financial Crisis) too,” Sotiriou said. The negative environment could cause an “uptick in foreclosures and bankruptcies.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, seconded the sentiment.

''There is unlikely to be sustained relief from the sinking feeling that has hit financial markets this week,” Streeter told CoinDesk in an email. “After the initial boost of optimism that the Federal Reserve was going to get a handle on inflation with the 0.75% rate rise, the mood soured on Wall Street as concerns mounted that the price spiral was going to be an even harder nut to crack, without fresh aggressive hikes.”

Some, like Alex Kuptsikevich, an FxPro senior market analyst, maintained a bearish outlook for bitcoin in the short term.

“The bearish focus remains on the $20,000 level, the former peak of 2017. At no time in past cycles has BTC fallen below the high of the previous bull cycle,” Kuptsikevich explained in an email.

The analyst added uncertainty surrounding cryptocurrency fund Three Arrows Capital could result in contagion risks amid growing speculation about “its possible bankruptcy.” The fund is said to have faced at least $400 million in liquidations after failing to meet collateral requirements on its levered positions, as previously reported.