Crypto Market Sentiment Turns to ‘Extreme Fear’ on Fed’s Hawkish Move

The total market value of cryptos has fallen 14% in the last week, and gloomy mood is returning as big assets continue to be sold off.

One market attitude indicator has now changed to "severe dread," implying that further losses are on the way. The cryptocurrency "fear and greed index" examines and integrates emotions and sentiments from several sources into a single statistic.

The fear index is presently at 23, indicating intense terror. Sentiment has dropped from around 80 in early November to the low twenties in the last few months. The index fell to a six-month low of 10 on January 8.

The last time such a change in market sentiment occurred was in May 2021, when crypto markets had a 50 percent correction in the months thereafter.

The current crypto market slump is roughly 33% off its all-time high of little over $3 trillion on November 10th.

Blame the Fed

Industry watchers and commentators are increasingly blaming the US Federal Reserve for the current lack of faith in crypto investments.

On Jan. 9, economist and trader Alex Krüger sent out a long tweet to his 114,000 followers explaining why he believes the Fed's hawkish tilt will hurt markets even more.

"The latter is troubling enough to spark a bear market," he continued, referring to the Fed's abrupt shift in posture in an endeavor to cease stimulus operations and boost interest rates with faster balance sheet reduction.

Analysts are concerned about the Fed's haste in changing policy, as the central bank seeks to reverse asset purchases undertaken during quantitative easing (QE). This is awful news for crypto markets, and it's likely to blame for the 15% drop so far this year.

"Crypto assets are at the far end of the risk curve," Krüger remarked. As money transfers away from riskier asset classes, they suffer from unexpectedly restrictive monetary policy, just as they profited from unusually permissive monetary policy."

"The Federal Reserve's apparently endless asset purchases have been the cornerstone for crypto investment," said Michael O'Rourke, chief market strategist at JonesTrading. The Fed's decision to end QE means that the USD will appreciate, inadvertently weakening crypto assets against it.

Where to Next for BTC?

Mike Novogratz, CEO of crypto investment management firm Galaxy Digital, told CNBC on Jan. 6 that he believes the bottom will be around $38-$40K. Lower targets of $30K for BTC and $2K for ETH were indicated in Bloomberg's January Crypto Outlook report.

Bitcoin was trading at roughly $42,247 at the time of writing, up barely 0.5 percent on the day. However, the bears are gaining momentum, so further losses are anticipated.