Bitcoin plunges as investors exit extreme high risk-assets

Risky asset classes like cryptocurrencies are bearing the brunt of volatility in the lead up to the US Federal Reserve (The Fed) meeting on Wednesday. 

Bitcoin plunged in overnight trade, down -6.7% to US$46,700, smack bang in its 200-day moving average. Other high-profile cryptocurrencies sold off even harder, including Ethereum (-8.4%), Solana (-10.1%) and Cardano (-9.1%). 

The overall market capitalisation of cryptocurrencies shed -7.5% or US$171bn to US$2.1tn.

Why The Fed matters 

In November, the Fed announced it would reduce its US$120bn monthly bond purchases at a pace of US$15bn a month. 

The bond-buying program, better known as quantitative easing, was introduced in early 2020 to buoy the economy and financial markets. 

After 19 months of bond-buying, the Fed managed to double its balance sheet to a record US$8.6tn. Without extraordinary monetary stimulus, who knows where the financial markets might be. 

Fast forward to today, where inflation is running rampant, the Fed wants to speed up the reduction and roll back monetary policies that have helped stocks more than double from March 2020 lows. 

Ultra low interest rates and ample liquidity has increased investor appetite for riskier assets like equities and cryptocurrencies.

But the next few months could mark the end of an era as global economies begin to hike interest rates to tackle surging prices. 

According to Bloomberg, economists are predicting two rate hikes next year from current near zero. While Morgan Stanley has gone as far as saying we could see five rate hikes over the next two years.

Cryptocurrencies and equities alike are trying to price-in the new playing field, and in doing so, has subjected investors to heightened levels of volatility.

Higher interest rates could see shift funds back into fixed-income assets. While a sudden dry spell for liquidity could continue to weigh on risk-assets.

Bitcoin has fallen -30% since its 8 November record high of US$69,000. The largest cryptocurrency is clearly exercising some degree of damage control for the Fed's upcoming meeting.

There is potential for renewed volatility if the Fed decides to take a more hawish-than-expected view on monetary policy.