Cryptocurrencies Plunge Analysis on May 5th

Cryptocurrencies and the S&P both tumbled shortly after the US stock market opened today. Bitcoin plunged more than $3,000, or 6.3%, in a short period of time. In the last 24 hours, according to Coinglass, more than 100,000 people blew up worth a total of $370 million.

（Bitcoin Price, source：Tradingview）

The main reason for the market plunge is the Federal Reserve's latest monetary policy. Although on the previous day, the Federal Reserve announced a 50BP interest rate hike and postponed to June to start the shrinking of the balance sheet, which removed the market's concerns about the 75BP interest rate hike and the shrinking of the balance sheet in May, the US stock market and cryptocurrency both rebounded on that day. However, the policy effect of raising interest rate 50BP still cannot be ignored.

History shows that the 50BP interest rate hike in 1994 and 2000 produced different effects: the former achieved a soft landing of the US economy and maintained healthy economic growth; the latter punctured the stock market bubble and caused the U.S economy to fall into recession.

（Economic effects of two 50BP hikes in 1994 and 2000, source: Bloomberg）

The 50BP interest rate hike in 1994 was successful for two main reasons: one was a precautionary advance rate hike, and the other was a stable external environment. The failure of the 50BP interest rate hike in 2000 was mainly due to the fact that the U.S. stock market was already volatile at that time, and the 9/11 incident in 2001 shook the security and market confidence of the U.S.

Compared to 1994 and 2000, the macroeconomic backdrop in 2022 is volatile and highly uncertain. At this time, the rate hike is no longer a precautionary rate hike, which happened in 1994. The impact of the COVID-19 and the Russian-Ukrainian war has amplified the uncertainties of market. More important，the stock market bubble is already high. As a result, this rate hike is now having catastrophic consequences similar to 2000.