Fed Policy and the Merger: Crypto’s Two Biggest Moments? | Cryptocurrency

  • Powel’s hawkish tone disappointed stock and cryptocurrency markets.

  • For stock indices and Bitcoin, September is historically a bad month.

  • Ethereum Merge won’t mean much for an average user, but a lot for the industry.

Now that September has begun, markets just seem reeling from the Federal Reserve’s more hawkish stance than they anticipated.

In sync with the stock market, the cryptocurrency market fell after the Federal Reserve expressed its hawkish views on Friday, August 26. At the economic symposium in Jackson Hole, Wyoming, Fed Chairman Jerome Powell said the Fed would continue to raise interest rates until inflation is contained. . He pointed out that history warns against premature policy easing, citing the June FOMC projections for a federal funds rate of just below 4% by 2023.

The Federal Reserve draws three lessons

According to Powel, the Fed learned three lessons from the inflation of the 1970s and 1980s. To begin with, the central bank must take responsibility for ensuring low and stable inflation. Then comes an interesting question: if consumers expect inflation to be low and stable, it will be. In other words, if you convince people that everything will be fine, everything will be fine. Here’s some evidence to support this theory – US consumer confidence rose for the first time in four months in August, according to the latest Conference Board report.

The third lesson is to keep going, no matter how long it takes – stay focused on your chosen path.

Powel went on to explain that the pain associated with rate hikes, slower economic growth (probably a carefully chosen phrase to describe a recession), and a weaker labor market would all be better than the pain if the Fed hadn’t not take such an aggressive approach. .

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would indicate far greater pain,” he said. Well, that makes sense. There is no pleasure without pain, after all.

The Dow Jones fell 3% after Powell’s painful storyline, while the S&P 500 and Nasdaq Composite fell even more. Bitcoin also fell 6% for the day, following the trail of its traditional market counterparts.

There was some hope for investors in data released ahead of the Fed’s decision, when consumer spending edged up and inflation eased, suggesting the central bank may consider easing policy monetary. However, these hopes were dashed and the markets reacted accordingly.

Recessions usually begin with some of the most typical preludes such as macroeconomic uncertainty, geopolitical instability, inverted yield curves and the perception of an impending recession – they are all intensifying right now.

We are seeing a deeper and deeper inversion of the yield curve, with higher yields for 2-year government bonds and lower yields for 10-year bonds, although the latter carry more risk. raised.

Source: Fred.stlouisfed.org

To illustrate how deep it could sink, in the early 1980s, when Paul Volcker raised interest rates to 20% to fight inflation, the yield curve fell over 200 basis points. below zero.

Markets are now pricing in higher interest rates, so will the selling pressure continue? The S&P 500 posted an average loss of 0.6% in September since 1945, historically the worst month for the index. Bitcoin has also been in the red in September for most of its history.

Bitcoin

Source: Coinglass.com

Ahead of the highly anticipated August US jobs report, a number of economic reports will emerge, including construction spending and vehicle sales in the US, affecting stock markets and therefore cryptos. . It is therefore worth paying attention to it.

The Contribution of Merger to the Cryptocurrency Market

Around September 15, the Proof-of-stake (PoS) beacon chain (ETH2) will swallow Ethereum (ETH1). What will this mean for the cryptocurrency market?

First, the argument that Ethereum, DeFi, and NFT are environmentally harmful will be put to rest. Therefore, ESG-compliant institutions will find Ether an attractive investment.

The merger will also result in fewer ETH tokens being issued. There is currently a 4.3% increase in ETH supply every year, which is an incentive for miners to secure the blockchain. The merger will give validators exclusive control over block creation, reducing the energy required for Ethereum. With a decrease in ETH issuance, supply and demand will take over, driving the price of ETH higher. Beacon is secured by ETH staking and users are rewarded with block rewards for staking. Staked ETH can only be withdrawn six months after the merger, which also reduces its circulating supply.

From the perspective of the average user, although Ethereum is moving from proof-of-work to proof-of-stake, its entire history remains intact – your ETH funds in your wallet before the merger will remain accessible post-merger. You don’t have to upgrade.

On top of that, the merger will allow users to protect the network at home instead of having to rely on institutions and large miners to do so. This will allow the network to become more decentralized and therefore more resistant to attacks.

From the perspective of miners, it will be very difficult for them to choose whether to continue mining the current/then old Ethereum chain and face many challenges or abandon it completely and lose their profits.

Some exchanges have already announced that they will list a possible ETH POW coin after the merger. From what we know so far, Poloniex, BitMEX, MEXC Global, Gate.io, and OKX will list ETHW. It is possible that DEXs like Uniswap will list ETH POW tokens even before CEXs. Additionally, traders can trade ETH POW futures similar to those offered on BitMex. This is a purely speculative market – it is not even guaranteed that the ETH POW token will exist.

Chart

Source: Ethereum.org

It is clear from the continued existence of Ethereum Classic that old and unused chains can still be valuable. However, unlike previous Ethereum forks, this one comes with a large ecosystem of applications and tokens. There will be ETH-backed assets in an alternate network that miners will continue to carry on their shoulders. The merger, for example, will allow you to own twice as much USDC and twice as much NFT Ethereum. However, the POS chain has been widely supported by major exchanges, so it doesn’t matter in practical terms. All POW tokens except Ethereum POW itself are likely to become worthless after The Merge.

Final Thoughts

Doomsayers always predict a crash during major market developments like The Merge or pressure factors like the Fed’s aggressive monetary policy. Cryptocurrency proponents have proven these pessimists wrong because the market is not dying and is even attracting new investors. With $10 trillion in assets, Blackrock, the world’s largest investment manager, has entered the Bitcoin space. He would not have done so if the value of Bitcoin was zero. Cryptocurrency follows stock market movements closely, but they are not the same in essence – crypto is a network similar to the Internet rather than a business with profits and assets.

As the development of Ethereum progresses, it will also contribute to the adoption of itself and other cryptocurrencies.

Additionally, all of this is happening during highly uncertain times, with inflation peaking, a recession already underway or impending, and global financial disruptions, all of which are expected to drive up Bitcoin and Ethereum adoption and prices. long-term.

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Fed Policy and the Merger: Crypto’s Two Biggest Moments? | Cryptocurrency


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