Bitcoin’s bull run comes to a sudden end as Fed Chair Powell raises stagflation fears, sending shockwaves through the markets and causing a 2.5% drop in bitcoin’s price.
Bitcoin Rally Short-Circuited as Fed Chair Powell Raises Stagflation Fear
The price of bitcoin (BTC) fell about 2.5% in the minutes following Federal Reserve Chairman Jerome Powell’s remarks on Wednesday, now trading at $83,700, down 1.5% over the past 24 hours.
The Impact of Powell’s Warning
Powell warned that President Trump‘s tariff policy could lead to higher inflation and slower growth, sparking concerns about stagflation – a phenomenon characterized by weak economic activity alongside double-digit inflation. This warning sent shockwaves through the markets, with U.S. stocks also taking a hit, as the Nasdaq slumped 3.4% to a session low.
Stagflation is a rare economic condition where there is a simultaneous increase in inflation, unemployment, and a decline in economic output.
This phenomenon occurs when the usual trade-offs between inflation and unemployment break down.
According to the International Monetary Fund (IMF), stagflation can be caused by factors such as supply shocks, monetary policy mistakes, or external shocks like wars or natural disasters.
In 1970s, the United States experienced a severe case of stagflation, with inflation rates reaching 14% and unemployment rates remaining high.
Powell’s Comments on Crypto
Powell mentioned that as crypto becomes more mainstream, there is a need for a legal framework for stablecoins. He also stated that banking regulation around crypto will likely be ‘partially relaxed.’ This could have significant implications for the development of the crypto space.
Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a fiat currency, such as the US dollar.
They achieve this stability through various methods, including pegging their value to an external asset or using algorithms to adjust supply and demand.
Stablecoins are often used for trading, remittances, and as a store of value due to their reduced volatility compared to other cryptocurrencies.
For instance, Tether (USDT) is pegged 1:1 with the US dollar, while others like DAI use a collateralized debt obligation model.
Analyst Reaction
Quinn Thompson, chief investment officer of hedge fund Lekker Capital, described Powell as ‘extremely hawkish’ and said that a May rate cut appears to be off the table. He also noted that investors should temper their expectations for rate cuts in the upcoming meetings, which could weigh on risk assets including crypto.
The Bull Case for Crypto
Thompson’s comments highlight the importance of liquidity and policymaker intervention in the bull case for crypto and bitcoin. However, with Powell’s warning about stagflation, it seems that investors may need to be more cautious in their expectations.
Latest Updates
The U.S. Senate Banking Committee cleared a bill to regulate stablecoin issuers in March, marking a significant step closer to law in the U.S.
Regulators worldwide are scrutinizing stablecoins, a type of cryptocurrency pegged to a fiat currency.
Stablecoins aim to reduce volatility by maintaining a stable value, but their lack of regulation has raised concerns about market manipulation and potential risks to financial stability.
In the US, the Securities and Exchange Commission (SEC) is exploring whether stablecoins should be classified as securities, subjecting them to stricter regulations.
The Financial Stability Board (FSB) has also called for global coordination on stablecoin regulation.
As the use of stablecoins grows, regulatory clarity is essential to prevent potential risks.
