To Profit From Ethereum in 2022, Watch the Federal Reserve

Sometimes, the world of cryptocurrency and the blockchain feels like a separate world from other areas of finance. Ideally, popular crypto coins like Ethereum (CCC:ETH-USD) would be shielded from government and central-bank actions. In reality, though informed investors shouldn’t just buy Ethereum without considering those actions.

Close up image of a Ethereum (ETH-USD) crypto token.
Source: Filippo Ronca Cavalcanti/Shutterstock.com

Since early November of last year, ETH-USD has been crashing. Sure, you could choose to ignore this price collapse, as cryptocurrencies are generally prone to bouts of volatility.

Yet, price drawdowns aren’t just random occurrences, even in the wild world of crypto. It’s important to find out what’s going on, and to determine whether Ethereum should be “bought on the dip,” as they say.

After all, big dips can lead to bigger dips. If cryptocurrency prices continue to wobble and gyrate, there may be some excellent buying opportunities in 2022 — but you don’t want to get caught in a sustained bear market.

Analyzing the Ethereum Price

In 2021, $5,000 proved to be a stubborn resistance level as Ethereum ran toward that price several times. This occurred in May, September and November.

Each time, the buyers were rejected and a mini-crash ensued. They got ETH-USD really close to $5,000 in November, but then gravity set in.

Even in early 2022, the sellers remained in control. As of Jan. 11, Ethereum had pulled all the way back to around $3,200.

Still, there’s no need to panic-sell now. ETH-USD was only worth $731 at the beginning of 2021, so from a long-term perspective, the trend is still to the upside.

On the other hand, there may be some sizable price pullbacks coming. If you have a chance to buy Ethereum at $2,000, it’s not a bad idea to seize the opportunity — but stay informed and nimble, as the only real floor for cryptocurrency prices is zero.

What the Fed Said

Under normal circumstances, readings of the Federal Open Market Committee (FOMC) minutes are forgettable events. However, these aren’t normal circumstances.

On Jan. 5, 2022, the FOMC released the minutes from the Federal Reserve’s policy meeting from Dec. 14 to 15, 2021.

As you may recall, both stocks and cryptocurrencies became volatile in December due to investors’ fears that the Fed might reduce its balance sheet of government bonds and mortgage-backed securities.

There were also concerns that the central bank would raise the Federal funds rate — which influences all U.S. government bond yields — up to three times in 2022.

With all of that in mind, January’s FOMC meeting minutes were more important than usual.

According to the minutes, Federal Reserve participants “generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.”

On a Glide Path

Just that statement alone was enough to strike fear into the hearts of many investors.

Then, in a shocking Fed one-two punch, the FOMC meeting minutes revealed this: “Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.”

Immediately, multiple asset classes sold off. The prices of stocks, gold and cryptocurrencies all declined sharply. Meanwhile, the 10-year U.S. Treasury yield briefly reached 1.8% for the first time in many months.

Among stocks, the tech-heavy Nasdaq came under particularly strong selling pressure. Of course, ETH-USD and other cryptocurrencies are tech-dependent as well, so the Nasdaq’s problems could also be Ethereum holders’ problems.

Some financial experts are expecting the Federal Reserve to raise government bond yields as early as March. For example, Renaissance Macro’s Neil Dutta asserted, “The Fed is on a glide path to hiking in March… It is hard to see what is going to hold them back.”

The Bottom Line on Ethereum

If March is the crucial month to watch for a Fed rate hike, then multiple asset classes could be on the chopping block. Among the most vulnerable, I would suggest, are cryptocurrencies.

Therefore, an aggressive buy-all-dips strategy isn’t recommended with Ethereum right now.

However, it’s fine to accumulate some Ethereum coins if the price declines to a hard-to-resist level, like $2,000. Just don’t over-leverage yourself, as the Federal Reserve’s next move could be a financial bombshell.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


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