Market Wrap: Cryptos Recover From Drop After Fed Rate Hike; Expect Higher Volatility

Most cryptocurrencies traded higher over the past 24 hours, albeit with large price swings after the U.S. Federal Reserve raised interest rates for the first time since 2018.

The Fed also boosted its inflation forecasts and signaled plans to raise interest rates in similar increments six more times this year. Low rates and central bank stimulus have contributed to rallies across speculative assets, including cryptocurrencies.

Bitcoin (BTC) fell about 3% immediately following the Fed announcement, but quickly pared losses toward the end of the New York trading day. Similar price moves were seen in the S&P 500, while Treasury yields and the U.S. dollar pared earlier gains.

The central bank also announced that it will reduce its balance sheet of bond holdings "at a coming meeting," not specifying whether it will happen at the next meeting in May. Over time, analysts expect higher volatility and lower market returns as a result of tighter monetary policy.

Meanwhile, on Wednesday, Ukrainian President Volodymyr Zelenskyy legalized crypto in the country. The law determines the legal status, classification, ownership and regulators of virtual assets. Ukraine has received at least $100 million in crypto donations over the past three weeks from people who want to support its defense and help fund humanitarian efforts.

In crypto markets, many alternative cryptocurrencies (altcoins) outperformed on Wednesday, suggesting a greater appetite for risk among traders. Chainlink's LINK was up 5% over the past 24 hours, compared with a 10% rise in SAND and a 2% gain in BTC.

Latest prices

●Bitcoin (BTC): $40,771, +2.41%

●Ether (ETH): $2,741, +2.93%

●S&P 500 daily close: $4,358, +2.24%

●Gold: $1,927 per troy ounce, −0.07%

●Ten-year Treasury yield daily close: 2.19%

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.

The chart below shows elevated BTC implied volatility versus realized volatility, which means bitcoin traders have positioned themselves for an increase in price swings over the past week.

Lately, there has been large demand for longer-dated options toward June-December, coupled with increased activity in ETH put options, according to QCP Capital, a Singapore-based crypto trading firm. QCP expects BTC's volatility curve to steepen after the Fed decision as traders discount short-term price price swings.

The options market has placed a 52% probability that BTC will trade above $38,000 in April, according to Skew data.

Bitcoin correlations

Bitcoin's 90-day correlation with the overall crypto market is near all-time highs, which makes it difficult for investors who want to diversify across tokens.

Generally, altcoins outperform during bull markets because they have a greater risk profile relative to bitcoin. And during down markets, bitcoin outperforms as investors reduce their exposure to risk. So, when correlations are high, there is less opportunity to reduce volatility in a crypto portfolio, which is why some traders have remained on the sidelines.

Rising correlations "paint a picture of an overall risk-averse sentiment in the market," Arcane Research wrote in a recent report. "In the summer of 2020, the correlation was headed downwards, caused by bitcoin's strength compared to altcoins. The correlation bottomed in Jan. 2021, before it grew as altcoins began moving more inline with bitcoin."

Since cryptos have moved in the same direction over the past year, there is less desire among traders to rotate into altcoins, according to Arcane Research. That could enhance bitcoin's outperformance relative to altcoins.

Altcoin roundup

• GRT post rally: GRT, the primary token on the Graph ecosystem, is up 23% over the past week due to the continuing subgraph migration from Ethereum to the Graph's mainnet. The Graph also announced last Friday plans to award grants to help the migration until the end of March. Also, the Graph Day, the protocol’s yearly convention, will be held on June 2, fostering discussion around Web 3 innovation.
• Fantom’s FTM price jump: The announcement of upcoming protocol updates triggered FTM, the primary token on the Fantom Network, to rise as much as 10% over the past 24 hours. Fantom is a layer 1 blockchain platform that powers decentralized finance (DeFi) applications. The foundation behind Fantom plans to enhance its network with lower memory consumption, improved storage capabilities and new security features. Read more here.
• DeFi platform Aave launches version 3 with cross-chain swaps: The Aave Companies announced Wednesday the launch of Aave v3 across six different blockchains. Headlining the new features are cross-chain “portals,” isolated markets that will allow the protocol to better compete with permissionless counterparts and a “high efficiency” mode enabling high loan-to-value borrowing on select assets, according to CoinDesk's Andrew Thurman. Read more here.

Relevant news

• Fed Raises Benchmark Interest Rate by 25 Basis Points
• Russian Crypto Miners Brace for Sanctions Fallout Amid Ukraine Conflict
• Ukraine's Zelenskyy Signs Virtual Assets Bill Into Law, Legalizing Crypto
• Binance's Middle East Progress Continues With Operating License in Dubai
• NY Fed Staffer Jumps Into DeFi as Euler COO

Other markets

Digital assets in the CoinDesk 20 ended the day higher.

Largest winners:

Asset Ticker Returns Sector Chainlink LINK +6.5% Computing Cosmos ATOM +5.0% Smart Contract Platform Polkadot DOT +3.5% Smart Contract Platform

Largest losers:

There are no losers in CoinDesk 20 today.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.