Crypto Market Crash & Fed's December Minutes

The recent cryptocurrency crash might have been painful for a lot of investors. Approximately $200 billion was wiped out from the cryptocurrency markets. What caused the crash and what should the investors expect going forward?

Until recently the federal reserves believed that the high inflation that we have been experiencing was transitory meaning that it was eventually fade away, however in their recent meeting in December, Jerome Powell, the federal reserve chairman admitted that the inflation is not transitory and we could even see inflation levels higher than expected.

This has triggered the federal reserve to think about raising the rates earlier than expected, just last year in March the federal reserve pledged not to raise the rates until 2024. For individuals who do not know why the increase or decrease in rates impact the markets, let me explain.

Raising rates means increased cost of borrowing, for individuals who have a housing mortgage or a credit card loan or any sort of loan specially with a variable interest rate would now be paying more to serve the interest if the rates were to move higher. This would eventually reduce the buying power of a person because they now will be spending more money on repaying their debt which originally they might be spending on good and services. 

Since the individual would not spend less on good and services, this would directly impact the businesses and less business could also mean employees might loose their jobs which would further impact the economy. This could lead to a vicious downward spiral and less confidence the economy. This is why the markets drop when talks of rate hikes are initiated.

So what should the investors expect going forward?

The direction of the crypto market depends largely on a few variables, firstly the direction the federal reserve takes in their next meeting which I believe is in March this year, secondly the global acceptance of cryptocurrency. A lot of the countries are accepting crypto as a legal tender however, worldwide acceptance would only come when major world economies start accepting cryptocurrency and we don't see that happening anytime soon.

The United States has been more welcoming towards cryptocurrency rather than India or China. China in 2021 increased the intensity of its crackdown the cryptocurrency markets and India on the other hand has intentions to introduce a bill to establish a central bank backed digital currency and ban almost all cryptocurrencies. Furthermore, it also crucial to see how the financial regulators embrace the cryptocurrency markets.

Bloomberg senior commodity strategist Mike McGlone believes Bitcoin & Ethereum has a solid base to surge to $100,000 & $5,000, however not a lot of analyst are quite optimistic about the crypto market. I think the direction of the crypto markets all depends on the route that the federal reserves opts for and the global acceptance of the market