Central Bank Actions Are Likely to Wreak Havoc on Ethereum

It’s been a wild, crazy year for Ethereum (CCC:ETH-USD), but that’s the nature of cryptocurrency. If you’re going to hold this crypto for more than a few minutes, you’ll definitely want to brace yourself for volatility.

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2021 was replete with good times and major challenges for ETH holders (or to coin a phrase, HODL-ers). The emergence of non-fungible tokens, or NFTs, has been particularly exciting for investors in the world’s second-biggest crypto.

But of course, governments will govern and regulators will regulate. Every time a national government (usually China) clamps down on crypto, Ethereum investors feel the ripple effects.

Now, it’s the Federal Reserve’s turn to potentially wreak havoc on the crypto-sphere. If you’re not monitoring the Fed’s words and actions in 2022, then you’ll miss out on some key pieces of the puzzle that could impact your bottom line.

Analyzing the Ethereum Price

The magic number for ETH traders is apparently $5,000. That’s been a frustrating resistance level, and a ceiling which must be shattered at all costs.

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It’s not as if the buyers haven’t tried. They pushed the Ethereum price toward $5,000 in May before a horrendous crash ensued. Then, they tried again in September and got really close in November, but ETH collapsed each time.

During times of struggle, it’s often a good idea to relax and get some perspective. A little bit of gratitude can go a long way. Remember, Ethereum was only worth $731 at the beginning of 2021. The HODL-ers have come a long way since then and have enjoyed tremendous gains.

So, you don’t have to be deterred by pullbacks of 20% or more. Cryptocurrency is known for shaking the weak hands out — and you don’t have to be one of them.

A Major Pivot

While you’re busy obsessing over the $5,000 level, don’t forget to check for news developments which might impact the ETH price in 2022. One of the most significant things to watch is the Federal Reserve, and any actions it might take.

After all, the Fed has a major impact on the U.S. dollar. And if you’re reading this, then you’re probably measuring the Ethereum price in dollars.

On Dec. 15, the Federal Reserve acknowledged that it will probably phase out (or “taper”) its massive monthly bond-buying program next year. The nation’s central bank will do this as a way to curb rampant U.S. inflation.

Additionally, the Federal Reserve implied it may increase the Fed funds rate (which impacts government bond yields) by a quarter of a percentage point three times next year. Afterward, it will increase the rate three times in 2023 and twice in 2024.

“This is a major pivot from the Fed, prompted by clearer evidence that inflation is broadening,” commented Brian Coulton, chief economist of Fitch Ratings.

Three Hikes? Yikes!

As these hints were released, ETH jumped from $3,800 to $4,000 almost instantly. Again, the weak hands will always get shaken out. Folks who feared the prospect of bond-purchase tapering and interest-rate hikes dumped their Ethereum at the wrong time.

All they had to do was stay in the trade. Still, it might seem counterintuitive that tighter monetary policy would benefit cryptocurrency holders.

Edward Moya, senior market analyst at Forex trading platform OANDA explained how a too-fast tightening might put the crypto markets off balance:

“The fear is that if rate hike expectations become too aggressive, Wall Street may finally get that long-awaited pullback that will send markets to risk-off mode and punish the most profitable trade, which has been cryptos.”

The implication, presumably, is that volatility is likely to ensue in the short term, but wouldn’t be a permanent problem.

The Bottom Line on Ethereum

Regardless of any central bank’s words and actions, Ethereum is meant to exist independently. That’s one of the best features of cryptocurrency, generally speaking.

Yet, ETH holders must pay attention to the Federal Reserve. The central bank has a powerful influence on risk-off asset classes like government bonds and the dollar. Those assets, in turn, will continue to impact Ethereum and volatility is likely to persist in 2022.

That being said, big dips can lead to bigger buying opportunities, as crypto’s value should persist irrespective of how the Fed behaves.

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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