Bitcoin has demonstrated significant resilience despite concerns of potential interest rate hikes by the Federal Reserve. This follows Fed Chair Jerome Powell’s speech at the Jackson Hole symposium, where he suggested that more rate hikes might be necessary to combat elevated inflation.

Bitcoin Bounces Back After Jackson Hole Selloff

According to Sam Callahan, lead analyst at Swan Bitcoin, Powell’s hawkish tone at Jackson Hole unsettled some investors, causing declines in various asset classes, including Bitcoin. Callahan explained that as risk-free rates increase, funds are diverted away from riskier assets since investors can earn more attractive yields in Treasuries and money market funds.

Consequently, Bitcoin, equities, and other assets experienced drops following the indication of tighter monetary policy.

Callahan noted that inflation has decreased from its peak while unemployment remains historically low, suggesting that the Fed still has room to continue raising rates to bring inflation back down to its 2% target. Core inflation, excluding food and energy, is proving to be more persistent, particularly in services, as highlighted by Powell.

With the Fed appearing determined to tighten further, Callahan believes continued rate hikes could exert downward pressure on Bitcoin, which is still largely seen as a speculative asset.

Lingering Inflation Keeps Fed on Hawkish Path

Interestingly, Bitcoin’s price reaction to key inflation data this year has been relatively muted compared to 2022, when aggressive Fed tightening caused crypto markets to decline. Bitcoin has rallied in 2023 despite a drop in CPI from its highs.

Callahan explained that although rising real rates have typically constrained Bitcoin, issues on the fiscal side may be driving more adoption. He noted that as rates increase, budget deficits worsen an already unsustainable fiscal trajectory.

This could lead more long-term investors to consider decentralized assets like Bitcoin and gold as hedges against fiscal uncertainty. The unstable fiscal situation, combined with ongoing Fed tightening, may benefit Bitcoin as people consider the long-term consequences.

When asked about potential price catalysts, Callahan pointed to leveraged traders being “wiped out” as a foundation for upward continuity after cascading liquidations intensified the recent downturn. He also highlighted growing institutional interest as a key driver, citing BlackRock’s Bitcoin spot ETF application as a significant moment.

Institutions Warming Up to Crypto as Macro Hedge

Approval of the application could greatly expand access and demand from institutions currently discouraged by restrictions on direct Bitcoin investment. Retail investing would also become much more convenient with simple Bitcoin exposure through traditional brokerage accounts.

Overall, Callahan remains positive about Bitcoin’s investment thesis amidst macro uncertainty. While correlations with equities and vulnerability to Fed policy remain uncertain, Bitcoin continues to gain traction among institutions and investors seeking alternatives to traditional finance.

Its recent resilience despite hawkish Fed signaling seems to support its evolving image as a hedge against the mainstream monetary regime.

With leveraged excesses eliminated and expectations of easier access growing, the stage may be set for Bitcoin’s next bullish trend.


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