Exercise Your Ability to Brace For FOMC Volatility

A major interest rate decision is set to be announced on Wednesday, May 7, at 2:00 p.m. ET, followed by what promises to be a widely watched press conference from Fed Chair Jerome Powell at 2:30 p.m. ET. Why is this such a big deal for the crypto world? Going into the decision, markets have been a mixed bag.

While stock markets have been open over the past week, cryptocurrencies are mainly being dragged down by dwindling stock market performances. But when the markets closed heading into the last day before the FOMC decision (tomorrow), we have seen Bitcoin jump +2.2% as optimists try and capitalize on the increasing volume and inevitable panic sellers who are concerned about what havoc this decision will do to global markets.

Interest rate cuts by the Federal Reserve significantly impact crypto markets because these events typically make borrowing money cheaper and saving less attractive. When interest rates go down, investors often start looking for riskier places to grow their money, like stocks or cryptocurrencies, instead of leaving it in low-interest savings accounts or bonds. Crypto benefits from this because it’s seen as a high-risk, high-reward investment. So, when the Fed cuts rates, it can trigger a wave of new money (particularly from institutional entities) flowing into Bitcoin, Ethereum, and other digital assets, driving their prices up.

Also, rate cuts can signal that the economy is facing challenges, like slowing growth or low consumer spending. In these times, some investors turn to crypto as a hedge against problems in the traditional financial system. Bitcoin, in particular, is sometimes called "digital gold" because people hope it will hold value during inflation or economic uncertainty. So, when the Fed lowers interest rates to try and boost the economy, it can also boost excitement and demand in the crypto world, making it a big deal for traders and long-term holders alike. Here is a comparison of social volume for rate hikes for rate cuts across social media over the past couple years:

Of course, in the rally following last month's tariff-related crash, crypto was largely letting people down as (the real) gold was the primary benefactor. It can be rather unpredictable as to how much cryptocurrency is really being used as a hedge against economic uncertainty or struggles. Many theorize we will eventually have crypto used as a primary investment vehicle when investors distrust capitalism and economies. But they can often get a bit of themselves.

Having a 17 year-old asset take the place of gold (which has been a reliable source of value for many millenniums) is not an easy feat. Any time you log on to social media and find crypto discussions, you'll easily find discussions about the "digital gold" arguments in both directions, even when world economies aren't in such a state of turbulence:

As for where we are now... Things really began with Trump's tariff shocker from five weeks ago. When markets were really looking dicey during the first week of April, the likelihood of an interest rate cut was quite high due to the economic uncertainty and massive, historic short-term stock market crash (biggest daily drops in 5 years), going from $5,691 to $4,852 between April 2nd and April 7th. Peak fear then hit on April 9th, when markets made a double bottom.

And since markets began to quickly recover over the four weeks since, we have seen Trump putting the ultimate pressure on Jerome Powell to pull the trigger on rate cuts (after he declined to do so last month). Was causing this volatility to help justify future rate cuts all part of Donald Trump's plan as he implemented worldwide tariffs that rocked everyone and everything? Only he and his inner circle will likely ever know. But we have seen the US president's tactics of threatening the ultimate deathblow to people who stand in his own way, simply to get them to cave into following his plans.

Regardless of the political and economic tensions, as we sit now, Polymarket (and its unbiased nature) tells a pretty jarring story. The crowd overwhelmingly thinks that no change will be made, for the time being. This is a reflection of the world's confidence in the US Fed to essentially take into account the long-term implications of changing rates, rather than reacting to short-term outcomes.

This uniform crowd belief isn't stopping several individuals from making bold bets to win big, due to the lopsided odds of tomorrow's result. For example, Polymarket's "Baumpflege" has bet $7,000 to win $400,000 if the Fed cuts rates 25bps tomorrow:

Would you be this bold? If rate cuts actually do happen, it would be an absolute shocker based on the majority's expectations. It would not only signal that the Fed caters to the US administration due to fears of losing their individual positions. But it may also change the course of Trump's tariff decisions. Whether it happens now or later, if there are cuts, it could be followed by a cease of the aggressive tariffs that have caused lopsided and stagnant market growth.

The likely outcome clearly shows that no rate changes will be made. But just in case something other than this event happens, here is how each occurrence would likely impact cryptocurrency markets:

• Fed Cuts Rates by 25bps: Markets surge, Bitcoin likely rises significantly (above $100K) by end of week due to an overwhelmingly bullish response to the surprise decision
• Fed Leaves Rates the Same: Markets very mildly decline for 12-24 hours, then whale and shark behavior resumes its dominance over crypto's direction
• Fed Raises Rates by 25bps: Bitcoin would likely instantly fall by at least 5-10% due to an unprecedented outcome that nobody saw coming. Similar to the rate increases throughout 2022 (to correct the 2020 COVID-19 related cuts), this would be awful news for crypto as institutions flee toward bonds

We shall cover the outcome and Powell's explanations shortly after the fireworks tomorrow. In the meantime, we recommend hanging tight and not making any rash decisions with the way economic policies and surprises have been so full of surprises as of late.

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Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.