Could the Federal Reserve's announcement trigger a huge Bitcoin crash?

The cryptocurrency is more connected to conventional finance than many of you think.
Ameya Paleja
Bitcoin could its value fall by $10,000 or even morematejmo/iStock

Bitcoin and other cryptocurrencies could see a major crash after the U.S. Federal Reserve announces its interest rate decision on Wednesday, experts have warned. Bitcoin could crash by as much as $10,000 at its current rate and end up at $28,000, Forbes reported.

Bitcoin and other cryptocurrencies have always been volatile assets to hold, seeing sudden crashes after a tweet from a billionaire and rallying up to all-time highs in very little time after. However, the month of May has traditionally been a strong time point for Bitcoin, as compared to the U.S. dollar. So, the warning of a crash will come as a shock for many investors. 

Why could Bitcoin crash now?

Bitcoin is already at almost half the value it was trading at in November last year and a further drop in its value could be heartbreaking for many. However, the crash—if it happens—would likely be due to the monetary tightening of the U.S. central bank to rein in inflation. Forbes reported the Federal Reserve could see interest rates hike up by as much as 50 basis points—the greatest increase in 22 years. Such a historic increase is bound to see the squeezing of assets across the board and bitcoin and other cryptocurrencies would be no exception. 

However, according to a Coindesk report, analyzing Bitcoin's ups and downs over the years has shown the cryptocurrency follows trends similar to other products in traditional finance and is as much affected by inflation and monetary policies of central banks as stock prices are. 

If that were true, would there be some indicators that could point towards an upcoming crash? Experts think so. 

Signals of an upcoming crypto crash

Experts at Arcane Research plotted the correlation between Bitcoin prices and Nasdaq and found them to be at 0.7. The extremes of the scale were 1, meaning perfectly in sync, while -1 means prices moved in the opposite directions.

While the correlation figure shows the prices were more likely in sync, Bitcoin prices do not follow equity markets, rather macroeconomic forces have the same bearing on Bitcoin as on other markets, experts told Coindesk. If the Federal Reserve continues on its path of monetary tightening, Bitcoin is unlikely to be spared. 

Technical analysis of price charts is also another source of predicting where crypto coins are headed. Experts told Coindesk that investors have been bearish on Bitcoin for a while and analyzing current trends shows that Bitcoin is likely to dip further in the near term, if not crash suddenly. 

Since cryptocurrency transactions are publicly available on the blockchain, analysts also follow their acquisition prices by majority holders (10-100 BTC), also called Whales, on the chain. The lowest price or generational bottom for each cohort is likely to be the price of the coin in the near term. Currently, this price is between US$ 25,000-$27,000, experts told Coindesk, so we could possibly see the value drop from the $39,000-odd price, at the time of this writing.