Will the US Fed continue to influence the Bitcoin price in the 2023 financial year?

Bitcoin logo

Bitcoin logo

The Bitcoin (CRYPTO: BTC) price is up 2% in the last 24 hours to US$20,574 (AU$30,429).

That puts the world’s largest token by market cap up 7% two weeks into the nascent 2023 financial year (FY23).

FY22, as we covered here, presented two dramatically different halves for the crypto.

The first half saw the Bitcoin price hit all-time highs of US$68,790 on 10 November. The second half saw it sharply reverse course, tumbling 72% by 30 June and notching a 55% fall for the financial year just past.

That was then.

The question crypto investors have now is, what’s ahead in FY23?

What’s ahead for the Bitcoin price in FY23?

Gauging the 12-month price outlook for assets as notoriously volatile as cryptos is no precise science. To say the least.

What we can do is look at what impacted the Bitcoin price over the past year and extrapolate from that what may be in store for FY23.

The real bugbear for most all cryptos in the second half of FY22 was the changing outlook for inflation and interest rates.

Bitcoin and most other risk assets, like high growth tech shares, were riding high in the first half of FY22 based on investor assumptions that inflation and interest rates would remain at historically low levels into 2024, or beyond.

Of course, you know how that assumption worked out.

With inflation numbers running hot, central banks – led by the US Federal Reserve – flip-flopped and began issuing hawkish signals and instituting a series of aggressive rate rises.

This saw cryptos and tech shares crash, with the tech heavy NASDAQ falling 31% from its own record highs in November through to the end of FY22.

As for the Bitcoin price reaction, as eToro’s market analyst and crypto expert Simon Peters explained:

Crypto markets are very sensitive to US markets, in particular to monetary policy decisions from the Fed to combat rising inflation. The raising of interest rates and rising bond yields have affected US equity valuations and, by extension, crypto markets in recent months.

If the correlation between Bitcoin and the Fed’s policies continues through FY23, then the price will follow a similar trend to what we can expect to see on indexes like the NASDAQ.

In other words, keep your eye on the Fed.

But could Bitcoin decouple from equity markets?

Can cryptos decouple from share markets?

Tony Sycamore, market analyst at City Index, noted the Bitcoin price’s surprising strength in the wake of Wednesday’s scorching inflation numbers out of the US.

“Signs of resilience emerged that indicate Bitcoin may be closer to a bottom than some may think,” he said.

According to Sycamore:

The shockingly high inflation numbers postpone expectations for a dovish Fed pivot and have again raised the prospect of more aggressive Fed rate hikes.

In months gone past, this combination would have been enough to see Bitcoin fall into an abyss. However, after initially falling 3% to a low of US$18,905 after the release of the inflation number, Bitcoin closed 4.7% higher at US$20,230. An unexpected sign of strength and decoupling from the equity market.

Mati Greenspan, CEO of Quantum Economics, said there’s no underlying reason why the token should lose ground alongside other risk assets (courtesy of Bloomberg):

At the moment, Bitcoin is correlating downward with other risk assets but there isn’t any fundamental reason for it to do that. Once it breaks correlation with the stock market, Bitcoin’s price will better reflect its true value.

Will FY23 see Bitcoin break its correlation with growth shares?

Time will tell.

The post Will the US Fed continue to influence the Bitcoin price in the 2023 financial year? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin. The Motley Fool Australia has positions in and has recommended Bitcoin. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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