Fed upsets the markets by dictating a hawkish line

Following the harsh words spoken by Fed number one Jerome Powell, both equity and cryptocurrency markets have taken a hit, and a 75 basis point rate hike is on the horizon.

Fed’s words hit markets

On the 25th, at Jackson Hole, the annual symposium at which the Fed dictates the way forward and which last year failed to forecast by underestimating the imminent arrival of lasting double-digit inflation and a recession on the horizon, Chairman Jerome Powell warned markets that the only important thing right now is to wipe out inflation even at the cost of worsening the economic situation. The speech hints at new sharp rate hikes and this resulted in a collapse in all assets. 

The combination of quantitative tightening (QT) in September and the increase in interest rates (up to 150 basis points) will put a lot of pressure on risky assets.

The ratio of the most capitalized cryptocurrency and the Nasdaq has been declining since early 2022, partly because Bitcoin is perceived as a risky asset. 

The macroeconomic situation affects the price of BTC, and the collapse of Terra, the Celsius case, and the recent Tornado Cash issue have aggravated the situation.

Bitcoin is back below the $20,000 support level for the first time since July 14 and it has underperformed the Nasdaq this year, but BTC is not alone in its decline; the same is happening with stablecoins. 

Ethereum has followed its big brother by falling below $1,500, and so have most digital currencies. 

Ethereum’s migration from Proof of Work to Proof of Stake, the sanctions that came with the Tornado Cash issue, and censorship at the blockchain level have generated discussion about the future of DeFi. 

The cryptocurrency market reaction

Despite the problems triggered by the Tornado Cash affair, Ethereum has been more resilient to the words of Jackson Hole than the rest of the cryptocurrency world, even in view of the September Merge. 

The Tornado Cash trial has done damage to the entire cryptocurrency world at least on par with Powell’s words, despite this, Monero (XMR), Zcash (ZEC), and Secret Network (SCRT), the three main privacy tokens have traced the market’s bearish footsteps.

Since early this month, ZEC and XMR are down about 12% (BTC and ETH are down 13%), while SCRT is down 7%.

Meanwhile, Binance one of the world’s largest exchanges, touched a new transaction record after two months of tax-free, while Coinbase the world’s second-largest platform for Ethereum by volume, gained 8.5% more from staking. 

Although the elimination of fees led to growth in trading volumes, it caused a contraction in liquidity. 

Coinbase was the first to issue a liquid staking token, cbETH. The currency, however, is exposed to further risks of centralization.

Its move to eliminate BTC fees has caused an increase in volume market share from 57% to over 80% today.