After May 4, the whole crypto market found itself in the red zone following the 0.5% rate hike introduced by the Federal Reserve. The anticipated move was first met with enthusiasm, yet the next day crypto imploded. Then, Terra’s algorithmic stablecoin UST depegged, sending shock waves across the market. As Luna Foundation Guard started emptying its Bitcoin reserves in a desperate attempt to save the peg, the “digital gold” nosedived to $29k, dragging the whole market with it.
As a result of Terra’s fiasco, the market slipped into the “extreme fear” territory, with the total market cap dropping from $1.73 trillion on May 3 to $1.24 at the moment of writing. Many rookie investors, who flooded the crypto market hoping for a hedge against inflation, lost their life savings.
“Without question, this is one of the most significant events in crypto history,” said Chiente Hsu, co-founder and CEO at the DeFi platform ALEX, in her interview with Bloomberg. “I highly doubt we would’ve seen Bitcoin dip below its $28k support level were it not for the contagion of fear Terra created.”
Now, the question arises for many, whether it's time to buy the dip or it’s better to wait for the next bottom.
First of all, due to the wider adoption, crypto became increasingly correlated with the equity market, particularly with tech stocks. According to the Santiment, the correlation between Bitcoin and S&P500 remains tight.
The Federal Reserve took a clearly hawkish stance in an attempt to curb inflation that nears a 40-year high as the consumer price index, a broad-based measure of prices for goods and services, increased 8.3% from April 2021. Federal Reserve Chair Jerome Powell sent the clear message that the central bank will raise rates until prices start decreasing.
“If that involves moving past broadly understood levels of neutral, we won’t hesitate to do that,” Powell told The Wall Street Journal in a live-streamed interview. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.”
Higher interest rates tend to negatively influence the stock market, as investors abandon risky assets for bank deposits and bonds that provide guaranteed higher returns. Fed policymakers expect rates to climb to nearly 2% on average by the end of this year, and close to 3% by the end of 2023 from the current range of 0.75%-1%. So the odds are high that rates will be raised several more times this year.
Economist Peter Schiff says he’s surprised Bitcoin hasn't declined quite as much as the equity market but warns investors about the upcoming bull trap, implying that crypto will drop lower.
The crypto trader Alex Kruger believes that Bitcoin may grow and then drop following the 2018 pattern. The analyst added that it’s pointless to anticipate where the price will move until September when Fed will decide whether to hike rates faster or slow down. Based on that, Kruger believes that risk assets will trade in a wide range, probably even retesting the lows.
On the other hand, Jeff Ross, the CEO of Vailshire Capital Management LLC, believes that Bitcoin will grow in price in the long run due to the limited supply locked at 21 million.
"Be fearful when others are greedy, and greedy when others are fearful,” Ross quoted Buffet, commenting on the Fear & Greed Index.