For better or worse, cryptocurrency investors have become Federal Reserve watchers. This is a phenomenon that arguably dates back to early 2020, when big institutional investors started moving into crypto. But this summer has been peak season for crypto Fed watchers. The Fed hiked interest rates by 75 basis points June, and then by another 75 basis points in July in an attempt to slow inflation. On both occasions, there was much hand-wringing over the future of Bitcoin (BTC -0.32%). Then came the big Jackson Hole, Wyoming, speech by Fed Chairman Jerome Powell on Aug. 26.
Suddenly, it seems like the entire Bitcoin narrative is being driven by the Fed. Crypto news sites are now filled with stories about the Federal Reserve and monetary policy. This connection has enormous implications for the future price of Bitcoin.
Bitcoin and the macroeconomic outlook
Most importantly, it could mean that the price of Bitcoin likely will not start to move higher until the Fed has finished its monetary tightening. This is a dramatic change in outlook. After all, it was only six months ago that some crypto investors were saying that Bitcoin was completely uncorrelated with the broader equity market. That was what made Bitcoin so attractive for many: By buying Bitcoin, you were getting access to an asset that could keep heading higher, regardless of the economic cycle. You didn’t have to know anything about economics to know that Bitcoin was headed to the moon.
But then came the crash. And then came the monetary tightening by the Fed. In both cases, it became evident that Bitcoin was no longer completely uncorrelated with the broader market. It was no longer going to be crash-proof. And it was no longer going to be inflation-proof. Fed watchers have debunked the previous narrative that Bitcoin is “digital gold” and a safe haven during inflationary times. The narrative that seems to be emerging is that Bitcoin is going to trade a lot closer to traditional assets from now on.
Bitcoin and the institutional investor
The narrative about Bitcoin for the past decade has largely been driven by retail investors. That’s because big institutional investors never had any real skin in the game. They dismissed Bitcoin as some kind of Ponzi scheme. They spread all kinds of fear, uncertainty, and doubt (sometimes called FUD) about Bitcoin. And they refused to add Bitcoin to their portfolios. So when they did speak out on Bitcoin, nobody really listened. If anything, the latest pronouncement by Wall Street bankers was met with scorn and derision on social media. What do they really know about crypto?
But this dynamic started to change in 2020, when big Wall Street banks began to embrace crypto. Suddenly, institutional investors were following the crypto market, and they were bringing with them all the tools they used to analyze traditional stock and bond markets. And that included the fine art of Fed watching, which has always been their secret weapon to gain a step on the average retail investor. From now on, I fully expect much of the Bitcoin narrative to be driven by these large institutional investors. They will release new price targets for Bitcoin, and dutifully adjust those price targets with every Federal Open Market Committee (FOMC) rate-setting meeting.
A new Bitcoin narrative?
To counter this new narrative, retail investors need to bring Bitcoin back. They need to recapture the same, freewheeling narrative around Bitcoin that existed a few years ago before Wall Street got involved. There’s a certain crypto-specific charm to a Twitter user with crypto laser eyes talking up Bitcoin that you aren’t going to get from a large institutional investor reading from a boring report. The same people who declared, “Bitcoin is digital gold” need to develop a new Bitcoin narrative. Otherwise, crypto investors are stuck with being Fed watchers for the foreseeable future.
With the Jackson Hole speech, the Bitcoin investment thesis has changed. Retail investors are going to be skittish about Bitcoin until the Fed brings inflation under control. Even people who never followed monetary policy now seem to be experts on the Fed and its impact on crypto, and they will go along with the idea that Bitcoin can’t bounce back until the U.S. economy bounces back. If Bitcoin traders have become Fed watchers, it could make it a lot harder to get any new rally off the ground.