And what does it mean going forward, when the dust eventually settles?
Since early June, ICP has oscillated within a price range of approximately $5 to $7 USD. Notably, this relative stability has followed historic losses across the crypto market, which saw BTC prices drop from near $30K to around $20K USD today. However, over the past week or so, people have begun talking about a possible spike in prices for cryptocurrency in general and ICP in particular.
Is there anything to this talk?
ICP Price and Market Trends
Due to cryptocurrencies' soaring popularity as investment options in recent years, Bitcoin and alt-coin prices have tended to mirror the vicissitudes of the broader, global market. This is particularly true regarding mortgage rates. For example, over the past 90-days, ICP price and the US 30-year fixed mortgage APR have had a Pearson product-moment correlation coefficient of about -0.9, which indicates a very strong negative association.
Other cryptocurrencies, Bitcoin included, have similar correlation coefficients with the US 30-year fixed mortgage APR. Simply put, when US mortgage rates go up, cryptocurrency prices almost always go down. Of course, correlation doesn't necessarily imply causation, but in this case, there is compelling reason to believe there is indeed a connection. It all traces back to the crypto community's arch-nemesis: the central bank.
The Federal Open Market Committee
The US Federal Reserve serves as the central banking system for the United States of America. It functions as a hybrid between a public and a private institution. While the Board of Governors is an independent government agency, member banks are more or less private corporations. These member banks hold stock in the Federal Reserve system and earn dividends. However, this stock doesn't entail a share of control or financial interest and cannot be used as collateral for loans.
In line with the Federal Reserve Act of 1913, the Federal Reserve aims to encourage job growth while keeping inflation under control. Leading the charge is the Federal Open Market Committee (FOMC). Its instrument of choice is the federal funds rate, which is the interest rate that banks charge one another for short-term loans. Banks pass on the rate increase to borrowers, which makes debt more expensive. And lately, the FOMC has been quite busy making debt more expensive.
Note well that recent FOMC meetings, especially the three that took place last spring, align well with downturns in the price of Bitcoin. When borrowing becomes more difficult, investment in speculative assets dries up. This drives down the demand for things like cryptocurrency, which, given the more or less constant (and perhaps increasing) supply, means that prices must fall.
Explaining the Crypto Price Spike
But shouldn't cryptocurrency prices continue decreasing with each new federal funds rate hike? Actually, no. Again, it comes down to supply and demand. In the housing industry, home builders and sellers still need to move inventory and lenders still need to acquire loans. Customers can only pay so much, so at a certain point, the industry has to cut losses and accept the pain.
And that's exactly what's been happening in the housing market. After rapidly rising in what might be described as an overreaction to federal fund rate hikes, mortgage rates are correcting downward. Similarly, the price of speculative assets like Bitcoin and ICP are correcting upward. Thus, the recent cryptocurrency price spike is likely due to modest corrective trends and not a resurgent bull market. However, the fact that a correction is occurring, and that Bitcoin price has remained flat across the two most recent FOMC meetings, indicates that price decline has either stopped or will at least substantially decelerate.
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