The tokens have been surprisingly – and relatively – resilient and stable over the last week while other assets have tanked. Most notably, the stock market plummeted last week and entered a bear market, following the Federal Reserve’s announcement that it would hike interest rates for the fifth time this year.
Bitcoin has struggled to stay above $20,000 over the past month, a key price point for the token. Bitcoin has ranged between $18,000 and $20,000 over that time, often in the $19,000 range. Ethereum’s price has been similarly low over the last month, dipping from $1,700 to less than $1,300 in mid-September. The price has teetered on the lower end of that spectrum over the last week, struggling to stay above $1,300.
The looming midterm elections and other macroeconomic factors will likely be major drivers of what’s going on in the crypto market, experts say. But more recently, there are a couple potential explanations for crypto’s recent resilience. One could be that long-term holders remain unfazed by current economic conditions, according to Chris Kline, CRO and co-founder of Bitcoin IRA, a digital asset technology platform for individual retirement accounts.
“There’s not as many newcomers to the market space as there were, say, a year ago,” Kline said. “It’s definitely slowed down on that front, but the existing clientele, the longer-term investors, they’re here and they’re resilient.”
Another explanation could be that bitcoin has become a great conduit for U.S. dollars in countries that are struggling with their own currencies, according to Mauricio Di Bartolomeo, co-founder and CSO of Ledn, a global digital asset savings and credit platform.
“Bitcoin is actually outperforming gold, the S&P 500, the great British pound, the euro, the Canadian dollar, and a slew of other foreign currencies and asset classes,” Di Bartolomeo said. “The world wants dollars, but those who have them don’t want to sell them. Bitcoin is a bit of a conduit to get U.S. dollars because it has great U.S. dollar liquidity.”
Whatever the reason for crypto’s recent resiliency and stability, there’s one thing experts agree on: It’s going to be a stacked and interesting end of the year, which will determine whether bitcoin and ethereum prices ultimately sink or swim. Here’s what to look out for in the fourth quarter.
What Do Experts Anticipate for Bitcoin and Ethereum in the Fourth Quarter of the Year?
Experts and investors alike are “cautiously optimistic” about crypto in the home stretch of 2022, said Kline, who noted that crypto typically has one impressive quarter each year.
The fact that bitcoin and ethereum are holding steady while other assets plummet are good signs – but the “cautious” part of that optimism is the acknowledgment that there are still a great many wildcards that could skew prices this year. Let’s get into them.
Federal Reserve Rate Hikes
The Fed has hiked interest rates five times this year. In short, the central bank is trying to cool off the economy in an effort to reel in rising prices. It’s a restrictive monetary policy stance that will have “necessary pain points” on the economy, according to Fed Chairman Jerome Powell, who as of late has been less sure of a “soft landing” and more adamant that the move will negatively impact employment.
There’s been a consistent pattern of crypto reacting negatively to Fed rate hikes. Most recently, the Fed raised rates by another 75 basis points in September, and bitcoin and ethereum prices reacted just minutes after the announcement was made.
But the crypto market’s reaction wasn’t as pronounced this time as it has been over the last couple of months. Experts think this could be because the Fed’s most recent move was exactly what the market expected, and so the risk might’ve already been priced in.
Despite that softer reaction, it’s a bit too early to say whether this is an official loosening between crypto prices and stock movement as a result of major macroeconomic events, according to Di Bartolomeo.
“If you look at the correlation with bitcoin and the S&P 500, or the NASDAQ, and you look at them on a 30-day framework, or even on a one-year framework, [the correlation is] still relatively strong,” Di Bartolomeo said. He added that it would take time for the data to show a loosening correlation at these timeframes, but if you “zoom in on the one-day or one-week correlation, you’re starting to see that drop.”
Two more Fed meetings are slated to take place this year, in November and December. Those meetings could bring more rate hikes, and with them, more volatility for bitcoin and ethereum prices.
Powell has consistently said the Fed needs to see significant progress on inflation before it eases back on hiking rates. Thus, the Fed’s moves will largely depend on inflation data through the rest of the year.
Crypto champions have touted the digital assets as a hedge against inflation. But over the last year, it’s become apparent that isn’t quite the case, at least right now.
“Neither gold nor digital assets, and in particular not bitcoin, proved a hedge [against inflation] because the problem is the dollar strength,” according to written statements from Dr. Martin Hiesboeck, head of blockchain and crypto research at Uphold, a global multi-asset trading platform that lets users trade crypto, fiat currencies and precious metals.
“We all thought that bitcoin was going to be an inflation hedge, but it turns out in times of war, the safe haven is still the U.S. dollar, which projects military might more than decentralized computer networks like bitcoin,” Hiesboeck wrote.
Crypto is a volatile and risky asset. So a good amount of appetite for risk is quite important for that market to remain healthy. Inflation readings have been bad news for crypto, since it’s propelled the Federal Reserve to slow down the economy, which has the effect of turning investor sentiment to the downside.
For example, we saw crypto prices fall after the U.S. Bureau of Labor Statistics released August inflation data, with bitcoin prices dropping 4% and ethereum 7% over the 24 hours at that time.
There are still another three Consumer Price Index and four Personal Consumer Expenditure reports to be released this year, and no one would be surprised to see them bring more volatility to the crypto market.
Since the crypto market has been reacting so directly to recent inflation reports, investors can expect to see further price drops if inflation worsens in the coming months, according to experts. Just how low prices could go, though, is still up for debate. Some experts contend that bitcoin is still poised for a massive dropoff into the $10,000 to $12,000 area this year, according to Wendy O.
U.S. Dollar Strength
Some experts postulate that crypto has been harmed by a strong U.S. dollar, and conversely, believe a weakening dollar would be a positive catalyst for crypto tokens like bitcoin and ethereum. Luckily for crypto holders, some analysts think the strength of the dollar could soon reach a peak.
“A weaker dollar typically is positive to stocks or anything that is denominated in U.S. dollars,” Di Bartolomeo said. “A weaker dollar tends to lift stocks, lift commodities and lift things like bitcoin. And so, I think a weakening dollar would be a tailwind [for crypto].”
That’s because what’s drawing dollars away from investments is the strength of the U.S. dollar itself, according to Kline. “If that cools off –– actually when it does, because everything cools off – you’ll start seeing funds diverge.”
The last wildcard for crypto this year are the midterm elections in November. Though it won’t see the same interest and turnout as a presidential election, there are still a lot of seats up for grabs that could shift power on Capitol Hill.
Election results are difficult to predict, and that places downward pressure and uncertainty on markets. But once that uncertainty dissipates, markets tend to lift and bounce back strongly after U.S. elections are over.
There may be a couple of reasons for this dynamic, but one explanation for that relationship is that incumbents on the reelection trail make moves in the 11th hour for the economy, passing bills or regulations that help zap some vigor into the market. And shortly after elections, lawmakers start pushing to make good on their promises, according to Di Bartolomeo.
“Whether the old person or the new person got elected, they want to be very quick to show that they are doing the right thing,” Di Bartolomeo said. “In some ways, the person bidding for reelection is motivated to spend and keep their constituents happy, and the person that recently got elected, especially if it’s a new person, will have an impetus to show that they’re going to make change happen. And so, this typically leads to jolts in economic activity and policy.”
What Should Crypto Investors Do to Navigate the Uncertainty?
Experts think you should let your investments sit. Cryptocurrency is already volatile and risky; quickly shifting economic conditions can further supercharge that volatility and crash prices as swiftly as it pulls them up.
With more inflation reports and potential Fed rate hikes on the horizon comes the possibility of an incoming recession. While experts are relatively optimistic about crypto’s prospect during quarter four, they haven’t ruled out further market dips. As such, you should stay the course on your long-term investments – and that’s true whether you’re talking about crypto or the stock market.
Investment experts recommend that you dedicate a maximum of 5% of your portfolio to crypto, and, whether you’ve yet to meet or exceed that number, they recommend that you don’t make impulsive moves when the market suddenly dips.