Bitcoin Sinks Below $27K as Federal Reserve, Powell Keep Focus on Inflation

Bitcoin BTC$89,397.76 sank below $27,000 as the U.S. Federal Open Market Committee (FOMC) did as was widely expected Wednesday, raising interest rates again, this time by a quarter point.

The decision reinforces the Federal Reserve's concerns that inflation remains problematic. The FOMC is "strongly committed to returning inflation to our 2% objective," Fed Chair Jerome Powell said following the rate increase announcement.

Yet, in a statement accompanying the announcement Wednesday afternoon, the FOMC also acknowledged this month's banking near-meltdown, saying that "recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation."

BTC, the largest cryptocurrency by market value, was recently trading at about $27,030, down 4.1% over the past 24 hours, with the BTC/U.S. dollar trading pair plunging as low as $26,815 at one point on the Coinbase exchange. Earlier Wednesday, BTC's price rose as high as $28,815, reaching its highest level since June 10 because some investors hoped the Fed would end its year-long diet of hawkish interest rate increases because of the recent bank failures. But the Fed dashed those hopes.

Powell’s speaking Wednesday afternoon also coincided with Treasury Secretary Janet Yellen speaking to senators that blanket deposit insurance “is not something that we have looked at ... in any way.”

The crypto market had "relatively high hopes of either no rate hike or very dovish comments from Powell" based on the last few days of price action, according to Lucas Outumuro, head of research at blockchain analytics firm IntoTheBlock.

"We did get some dovish guidance through the dot plot, but likely not as much as was priced in," Outumuro told CoinDesk. "Then Yellen's comment triggered stocks and correlation dots driving crypto lower as well." He added that Yellen's comment could be positive for crypto in the medium term.

Other market observers were also optimistic about bitcoin's price in the near future, given banking's calamities, which has undermined confidence in the sector. "Bitcoin, straddling between being the leading risk-on asset and a financial lifeboat in the event of an all-out banking crisis, has benefited from the recent turmoil and now the prospect that the Fed’s tightening could be over," James Lavish, managing partner at Bitcoin Opportunity Fund, told CoinDesk in an email.

However, Lavish said he would still expect volatility ahead as the recent banking crisis continues. "We march toward a recession, or worse, a much larger credit event occurs," he predicted.

Samir Kerbage, chief investment officer at crypto asset manager Hashdex, told CoinDesk via email that “while this rate hike is anegative for risk assets in general, it is positive for bitcoin and gold as this puts more stress on the banking sector."

Vineeth Bhuvanagiri, the managing director of Emurgo Fintech, the founding entity of the Cardano blockchain, said in an email to CoinDesk in an email that “banks are really struggling," adding, "Authorities are having to return to massive liquidity injections to shore up the financial sector. And bank runs are forcing investors to rethink what it is to actually own assets – that is, they’re realizing that deposits in banks can feature major counterparty risk."

Ether ETH$3,031.72, the second-largest cryptocurrency by market value, was recently hovering around the $1,740 level, down 3.1% from Tuesday, same time. Among other major digital currencies, crypto payment platform Ripple’s XRP token was recently down 11%, a reversal from earlier in the day when XRP jumped 20% on reports Ripple was well-placed to win a landmark case against the U.S. Securities and Exchange.

The CoinDesk Market Index, which measures overall crypto market performance, was recently up 4%.

Traditional markets fell, albeit not by much following the Fed announcement. The S&P 500, Dow Jones Industrial Average (DJIA) and tech-heavy Nasdaq all closed down 1.6%.

The two-year Treasury bond rate, a gauge that usually reflects near-term interest rate expectations, fell to 3.93%.

The U.S. central bank’s decision comes after February consumer price index data showed month-over-month inflation dropping to 6% from the previous month's 6.4% reading. Core data, which strips away volatile energy and food costs, ticked down slightly. The declining CPI suggested that Fed measures were at least slowly taming inflation and offered support for monetary policy observers who have insisted in recent months that the Fed had overstepped.

Meanwhile, the labor market has remained strong, with a drop in the most recent weekly U.S. jobless aid claims.

“I think Powell's gonna be very sensitive about surprising the market,” Ben McMillan, chief investment officer of crypto asset manager IDX Digital Assets, told CoinDesk prior to the decision.

But McMillan maintained that he had seen a more bullish attitude toward risk assets.

"We've noticed that people are starting to think of bitcoin as the same bucket now as commodities or hard assets as stores of value,” he said.

In an email to CoinDesk, Brent Xu, chief executive officer and co-founder of Umee, a Web3 bond-market platform, wrote that bitcoin had "shown remarkable strength during this global crisis involving the banks."

"Something resembling a mini bull run could be in play, but I think there’s a need to be cautious here," he wrote. "The Federal Reserve might continue hiking rates higher than expected – that is, beyond this most recent 25 basis point hike – given that inflation has yet to be tamed. A pullback could be in store because of this, meaning that it’s just too uncertain a time right now for more definitive calls to be made."

James Rubin contributed to this report.

UPDATE (March 22, 2023, 20:28 UTC): Updates with latest XRP and CoinDesk Market Index figures.