Markets reel in new fears. It was already assumed that the Federal Reserve (the Fed) of the United States would start raising interest rates from the March meeting. However, we are all assuming that they will do it the traditional way. That is, 0.25 points at a time. Recently, it has been suggested that a break from that tradition is possible. In other words, an increase of 0.5 points is possible. Certain. Inflation is too high. Certain. The Fed has taken too long to react. Will they dare to take such a big leap?
Investing, in a way, is the art of guessing. Obviously, to invest you need to have expectations. Where we are? Where are we going? If we think that the best is yet to come, we are optimistic. If we think that things will get worse, we are pessimistic. Optimists buy. Pessimists sell. Here is a great secret from the world of investments: The anticipation of the news is more important than the news itself. The rumor is more powerful than the fact. From this very fundamental principle, comes the phrase “Buy the rumour, sell the news”.
Suppose the market expects a big announcement on a certain date. Investors do not wait for that day to buy. They anticipate the facts. They prefer to act in the moment because they know very well that early investors have the upper hand. These early purchases generate the first increases. And those early rises reaffirm the bullish suspensions of the market. In this way, a small speculative boom is created around the event. All this happens before the fact as such. In the expectation phase, the market gives free rein to the imagination. And investors often fall victim to hype. Emotions create a bias. And the market temporarily loses its link with reality. In other words, madness breaks out.
On the day of the event, everyone who was thinking of buying already bought. If there was a lot of speculation in the anticipation phase, what usually happens is that the most experienced speculators start to sell, thus causing the first corrections. This very counterintuitive behavior always confuses the most novice. How is it possible that such a positive event is not generating gains? The most current, however, know that it is about buying the rumor and selling the news.
Initially, financial markets are assumed to be a reflection of reality. I’m afraid that’s not accurate. Markets are a reflection of the collective sentiment of investors. The reality is concrete. The facts are the facts. However, the market is illusory. This illusion is the mixture of three times in one. The past is memory. The present is perception. And the future is expectation. From this triangle, a feeling and an opinion are formed. From there, the investor buys, sells or holds. Will the month of March be better than the month of February? Right now, the market obviously thinks not. That opinion naturally creates a feeling of pessimism. Consequently, there is fear. People sell. But sell now. People don’t wait for March to sell.
Why are markets falling if the Fed hasn’t taken action yet? Well, because the markets anticipate. Does that mean that when the measures are taken the market will fall much more? Not necessarily. We return to expectations. The land is already tilled. Everyone expects an interest rate hike in March. If the Fed raises rates in March, there will be no surprises. In addition, corrections have already taken place in the anticipation phase. If the reality does not meet the expectation, a sudden movement can occur. Now, as a general rule, the fulfillment of an expectation is usually good news.
In March, when making a decision, investors will set their sights on April. Will the month of April be better than March? If the answer is yes, surely optimistic purchases are recorded. Again, this behavior could be extremely confusing to newbies. On twitter, I always read people confused with the market. This confusion in many cases is the product of ignorance. That is, it is assumed that the market is a reflection of reality. Fake. The market is a reflection of sentiment. In concrete reality, if the situation is unfortunate, the situation is unfortunate. In the market, if the situation is unfortunate, but a much better tomorrow is expected, the sentiment is bullish. At that precise moment, the market breaks with reality.
We have the unfortunate situation on one side and the market going up on the other. Then, the public wonders indignantly: How is a financial boom possible in the midst of a crisis? Obviously the public does not understand finance. Now, the current situation. The market was already beginning to digest the change in monetary policy. A consensus was forming around the possibility of 5 increases for this year. That is, it is about increases of 0.25 points in 5 meetings. That assumption gave the necessary clarity to generate some outbreaks of optimism. After all, this is not such a significant increase. It is an increase. But it still puts us at a relatively flexible rate.
The corrections we are experiencing now are due to the breakdown of this consensus due to the possibility now of a 0.50 rally at the March meeting. It is no longer the traditional 0.25 but a 0.50. Here things change. This surprise was not expected by the market. So, we returned to the territory of uncertainty. I return the fear. And the fixes are back. That is, we are losing the gains of the last rebounds.
What is Bitcoin? A code. That code represents an exchange rate. The BTC/dollar pair is the most important. And we must remember that a pair is made up of two elements. Bitcoin is a “wealth transfer” instrument. It is not a “wealth creation” instrument. Which means that the liquidity of the dollar is extremely important for the price of Bitcoin. As simple as that. Bitcoin thrives in times of optimism. The investor invests in Bitcoin in times of optimism, because he thinks that the liquidity of the dollar will increase its price. That doesn’t work the same way in a more conservative environment.
Whether we like it or not, the Fed is the conductor of this orchestra. Monetary policy influences the price of everything. Bitcoin and cryptocurrencies are no exceptions. How do we buy BTC? With currencies. With dollars. With euros. Money cannot exist on its own. Money is simply a medium of exchange. There is no intrinsic value. It is a human abstraction. Bitcoin is a code. A series of numbers and letters in a computer network. Out there, there is a world that produces goods and services. Human beings need these things in order to live. A code is not eaten. A code does not shelter you. The code is useful because of its ability to exchange. Bitcoin is its price in dollars. Bitcoin is the number of things we can buy with it. The Fed influences its price, because the Fed includes everything in the price.
This is an opinion piece and Cointelegraph does not necessarily endorse what is expressed here by the author.
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