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There are expectations that with the rise in inflation in the US, the Federal Reserve (Fed) will be increasingly hawkish on interest rates, which in turn would weigh on bitcoin prices.

However, according to digital asset manager CoinShares, due to the oil price and associated threat of recession, the Fed has limited firepower to raise interest rates.

“Furthermore, we believe interest rate expectations are already factored into the current bitcoin price," said CoinShares.

Bitcoin is currently trading around $29,000 level and has lost nearly 60% of its value since hitting all-time high of $69,044.77 in November 2021, as per CoinGecko, a digital currency price and data platform.

The Luna and UST stablecoin crisis has piled further pressure on digital assets. While the value wiped out from the Terra ecosystem was substantial (over $40 billion), it was not systemic to the wider crypto space, as it represented less than 2% of the stablecoin market.

According to CoinShares, bitcoin now has a well-established inverse correlation to the US dollar.

“This makes sense due to its emerging store of value characteristics, but it also makes it incredibly sensitive to interest rates. The price declines over the last six months can by and large be explained as a direct result of an increasingly hawkish rhetoric from the Fed. The Federal Open Markets Committee (FOMC) statements are a good indicator of this, and we can observe a clear connection to statement release times and price moves," it said.

On the other hand, bitcoin’s correlation to gold has declined while it has risen significantly when correlated against equities, particularly interest rate sensitive equities such as growth stocks.

The digital asset manager believes that in some ways this is a correct interpretation by the market; non-yielding assets will suffer during rate hikes.

According to CoinShares, while bitcoin’s price performance has been weak in the face of an aggressive Fed, the current hiatus in price performance may very well be short-lived.

CoinShares believes that a policy mistake is highly likely, where Bitcoin prices are likely to diverge from growth equities, with the former likely to benefit from a dovish Fed and weaker dollar, while the latter underperforming in the face of a recession or stagflation.

“Sadly, we believe that the US and the rest of the world are likely to slip into economic decline in 2023, although there are many unknowns. Perhaps it will be stagflation which then progresses into recession? As the liquidity trap really takes grip on central bankers, we believe bitcoin is a good insurance policy in the face of this monetary policy mess," said CoinShares.

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