Bitcoin's relief rally--after the US Federal Reserve's hawkish tone amid the new Omicron threat--seems to be fizzling out, as the largest cryptocurrency by market cap declined over 3.5 percent to $47,000.

Bitcoin had climbed over $4,000 to $49,000 on Wednesday, when the US central bank set the stage for raising interest rates earlier than expected, taking away the stimulus that had propped up the markets for more than a year-and-a-half. Its projections show interest rates can rise to 0.90 percent by the end of 2022, from the current near-zero levels. Some analysts referred to this hawkish tilt as "Powell pivot", as the policymakers were previously debating whether to raise rates at all as the inflation was transitory.

The Fed had also announced accelerating wrapping-up of the bond-buying programme, citing concerns of higher inflation. The pace of inflation is uncomfortably high, Fed Chair Jerome Powell had said at the end of the two-day policy meeting.

After the COVID-19 pandemic struck the country in March 2022, the Federal Reserve had decreased the interest rates to near-zero levels. And it was spending $120 trillion every month to buy treasury bills as a part of its crisis-level bond-buying programme.

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As the global economy showed signs of recovery from the pandemic, for months, Fed policymakers were of the view that inflation was "transitory" and that it would ease on its own as supply-chain bottlenecks eased. But no such luck. US inflation surged to 6.8 percent in November--the highest it's been since 1982.

Bitcoin, which had slipped below $50,000 after bears took over the market earlier in December, had risen over 2 percent to touch $49,000 again. However, it did not last long as the coin declined over 3 percent to $47,000 Friday. Meanwhile, the Bank of England raised interest rates from near-zero to 0.25 percent, becoming the first among the world's advanced economies to do so.

The drop followed the overnight sell-off on Wall Street when tech-heavy Nasdaq declined over 2.5 percent. Experts said investors are reallocating money from risky bets like Bitcoin and tech stocks.

"The crypto space is seeing a lot of repositioning and that is leading to some unwanted selling pressure, but the medium- and long-term outlooks remain firmly in place," Edward Moya, a senior market participant with Oanda told CoinDesk.

Bitcoin is considered by many experts as a hedge against inflation as the supply of Bitcoin is limited to 21 million, as opposed to, say, the US dollar, which typically increases over time. So if the supply of the US dollar increases, when that of Bitcoin is limited, the value of Bitcoin in USD should increase, ceteris paribus.

However, Bitcoin is also a risky asset. And easy money policies push investors to make risky bets, if central banks tighten monetary policies and make it harder to get credit, risky bets like Bitcoin become riskier and less attractive.

"On one hand, tightened monetary policy may lead to the less rapid growth of Bitcoin demand, as many use it to hedge against inflation, and less QE, in theory, means less inflation," Joe DiPasquale of crypto hedge fund BitBull told CoinDesk. QE, or qualitative easing, is a monetary policy tool in which central banks buy long-term securities to increase the money supply in the economy. Less QE decreases the money supply in the economy. Federal Bank's asset-buying programme (buying treasuries worth $120 billion) was the largest QE in history.

On the other hand, DiPasquale said, "the effects of the largest QE ever may lead to the largest inflation in history, regardless of the Fed attempting to scale back". If this happens, the demand and price of Bitcoin can rise to fresh all-time highs, DiPasquale said.

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First Published:Dec 18, 2021 7:23 PM IST