Markets have been hammering crypto portfolios in recent months, with once-celebrated DeFi projects slashing jobs and freezing withdrawals as crypto prices plunge from last year’s record highs. Investors may be asking what sparked this drastic shift in market sentiment toward the digital assets.
Sam Bankman-Fried, CEO of cryptocurrency exchange FTX, has pointed the finger of blame at the Federal Reserve and its aggressive interest rate hikes.
“The core driver of [the crypto downturn] has been the Fed,” said Bankman-Fried, who told National Public Radio on Sunday that the outlook for FTX was now primarily guided by what the Fed will do.
On Thursday, the Federal Reserve raised interest rates by three-quarters of a percentage point, its largest hike since 1994, to bring the benchmark funds rate to 1.5%–1.75%. Rates are now back to where they were before the COVID pandemic hit in March 2020. And the prospect of further interest rate hikes may mean more bad news for the crypto markets.
“People with money are scared,” Bankman-Fried told NPR.
Crypto proponents have portrayed digital currencies as both an inflation hedge and a portfolio diversifier, but the behavior of crypto markets in recent months has undercut these claims.
Cryptocurrency values have fallen amid soaring consumer prices and interest rate hikes, thus proving to be a poor hedge against broader economic conditions. Crypto prices have also crashed in tandem with sinking stock markets, making them less valuable as a way to diversify portfolios. Bitcoin and Ether are down 58% and 71% for the year, respectively. (In contrast, the S&P 500 is down just 23% for the year.)
Cryptocurrencies are instead looking more like a risk asset, similar to equities. Low interest rates and an era of “easy money” drove investors toward riskier plays like cryptocurrencies, meme stocks, or—for wealthier investors—venture capital in the hope of getting higher returns. That era may be over as a recession looms and interest rates rise, meaning investors are fleeing to safer assets.
Negative investor sentiment is putting pressure on the overall cryptocurrency sector. Last week, several crypto projects, like lenders Celsius Network and Babel Finance and hedge fund Three Arrows Capital, halted parts of their operations due to liquidity concerns.
FTX is currently weathering the bear market better than some of its competitors, which Bankman-Fried credits to a more responsible attitude to hiring than his more aggressive competitors. Exchanges like Coinbase and Gemini are laying off employees after a spate of hiring during last year’s crypto boom.
Cryptocurrencies went through a slight rebound in weekend trading. Bitcoin bounced back 7.9% over the previous 24 hours to reach $19,908 by noon Hong Kong time. Ether rose 12.3% to reach $1,071 over the same period.