The U.S. Federal Reserve is planning to raise the interest rate higher and has just announced two rate hikes for 2023 — triggering a Bitcoin price drop, from about US$40,139 yesterday to US$38,400. But despite the fall, Bitcoin’s dominance in the crypto market also rose by about 4%, to 45%, according to data from CoinMarketCap.

Investors have been anxiously watching the latest two-day meeting of the U.S. Federal Open Market Committee that just took place, hoping the central bank’s interest rate policy would remain near zero in the long term. However, Federal Reserve Chair Jerome Powell instead announced the Fed’s plan to raise interest rates twice in 2023 — much earlier than many expected — which led to both the Dow Jones Industrial Average and the S&P 500 immediately declining by 0.77% and 0.54% respectively, along with Bitcoin price.

“Lower interest rates and an abundance of easy cash in the system is supportive of higher asset prices. With cash being worth less, the price tag of things goes up. That’s true for equities, for real-estate and, yes, for crypto,” said Justin d’Anethan, head of exchange sales at Eqonex, the digital assets firm, in an interview with Forkast.News.

Bitcoin Against Inflation

Along with interest rates, the Fed also projected inflation to rise to 3% by the end of 2021 instead of the 2.2% the central bank estimated back in March.

News of rising inflation typically provides a bullish outlook for Bitcoin as people holding cash will have less purchasing power, while people holding BTC might find protection from this value corrosion.

“Crypto and specifically Bitcoin is seen as the ultimate antidote,” D’Anethan said. “With a decentralized, hard-coded and limited supply, BTC essentially means that whatever central banks print or whatever policies they adopt, Bitcoin holders have a scarce resource.” 

In the lead-up to the FOMC meeting, billionaire Paul Tudor Jones also reiterated his advice that investors hold diversified portfolios with at least 5% in Bitcoin as a hedge against inflation. Jones is reportedly going all-in on inflation trades as he predicted the Federal Reserve’s decision to allow inflation to rise aggressively with no immediate plans to rein it in.

“Knowing full well what damage can come to the markets from a single slip of the tongue , Powell was perfectly able to provide as little clarity as possible,” said Ben Caselin, head of research and strategy at AAX crypto exchange, in an interview with Forkast.News. “For example, Powell’s suggestion is that we keep our inflation expectations anchored in the 2% goal, because if we did not anchor our expectations in that goal, then how could we expect to reach that goal? This circular reasoning does not lead to much insight, except that we are likely to see more of what we’ve already seen over the past year and that the Fed ‘hopes for the best.’” 

“In other words,” Caselin added, “as already mentioned by Paul Tudor Jones, now is the time to allocate more to inflation hedges such as Bitcoin.”

The narrative of Bitcoin serving as a new “digital gold” and an inflation hedge has been a popular one with the Biterati, in particular the Winklevoss twins — early investors in Bitcoin who also founded Gemini, the crypto exchange — as the U.S. Fed has been printing money at a breakneck pace to keep the American economy afloat since the outbreak of the coronavirus pandemic. Multiple rounds of federal stimulus in the form of grants to businesses as well as cash payments to ordinary Americans boosted the supply of U.S. dollars in circulation by 32% between February 2020 and May 2021. During that time, the Fed’s balance sheet passed US$5 trillion, fueling inflation in economies tied to the dollar.

The massive amount of Fed money printing damaging heavily dollarized economies has been one of El Salvador President Nayib Bukele’s main arguments for his country’s recent move to adopt Bitcoin as a national currency.

Bitcoin dominance rising

Following the outcome of the FOMC meeting, Bitcoin dominance in the overall crypto market has also risen slightly, from 43.6% to the 45% mark. The rise in the BTC dominance index suggests that crypto investors are now moving more capital into the largest cryptocurrency by market cap for safety and could be an indication of a further inflation hedge.

However, as Bitcoin’s dominance continues to rise, the outlook could prove to be bearish for altcoins, which have been underperforming as of late.

Yesterday’s altcoin outperformers such as Polygon’s MATIC, AAVE, Luna and Polkadot have all fallen between 5% to 10% since the conclusion of the FOMC meeting. As for others in the crypto top 10, Ethereum’s ETH, Cardano’s ADA and Ripple’s XRP also fell around 5% in the immediate aftermath of the Fed announcement, but have begun to slowly recover today.

“If the BTC Dominance index continues to rise, I would venture to guess that it would be during a crypto-wide bearish move, where both BTC and alts fall but — with alts being more volatile — alts would continue to underperform as traders scurry back to the safety of Bitcoin,” said d’Anethan, of Eqonex. “Naturally, this is just one possibility and we might see the BTC dominance fall back down, from the current 45% to the previous 40%. This would then suggest a new risk-on/bullish environment, in which investors are happy to bet on more speculative projects.”

According to AAX’s Caselin, Bitcoin dominance continuing to rise doesn’t mean altcoins cannot grow, and investors should focus on the quality of the projects at this stage.

“One of the main reasons why we can expect Bitcoin dominance to continue rising and see adoption by countries such as El Salvador is because of its truly decentralized architecture. Bitcoin is non-sovereign and non-personal, unlike other major crypto assets and tokens which often revolve around a certain founder or team.”

Caselin also believes that Bitcoin price could be in for a massive increase by the year’s end.

“According to PlanB’s S2FX model, we can still expect Bitcoin to 7x this year and hit $288K USD this cycle,” Caselin said. “We may be far off now, but there is merit to anchoring our expectations in the Stock-to-Flow.”

At the time of publication Bitcoin’s price is down 2.57% at US$39,375 and the BTC dominance index has continued to hold strong at 45.17% according to CoinMarketCap.