The Fed could pump the breaks on bitcoin’s 1,500% rally

U.S. Federal Reserve Chair Janet Yellen addresses the Economic Club of Washington in Washington December 2, 2015.REUTERS/Joshua Roberts

• The Federal Reserve on Wednesday raised its benchmark interest rate 25 basis points to a range between 1.25% and 1.5%.
• Don Ross, the CEO of CODA Markets, a Chicago-based dark pool, thinks further rate hikes could pump the breaks on bitcoin’s eye-popping rally.

“I don’t like to feed the beast, but it’s hard to resist.”

Don Ross, the CEO of CODA Markets, a Chicago-based dark pool, is talking about bitcoin.

He’s a skeptic of the red-hot digital coin, which this year has soared an eye-popping 1,500%. The rise of bitcoin, which at last check was trading at $16,519 a coin, has taken both Wall Street and Main Street by surprise. But Ross said its appreciation makes sense. And might be connected to the activity of the Federal Reserve, which Wednesday announced a hike in its benchmark interest rate.

“The reason why it is believable is because of our outgoing Fed chair and her predecessor and the amount of credit that has been created in the last decade,” Ross told Business Insider in an interview.

The Fed, under chair Janet Yellen and her predecessor Ben Bernanke, kept interest rates at/near zero from 2009 to 2016. The Fed rate is the basis for how much banks charge people to borrow money. When the rate is low, credit is cheap and people borrow more.

“When the amount of leverage in the financial system or credit not backed by savings greatly exceeds the value of the actual assets of the global economy, which is currently the case, fundamentals have nothing to do with the prices at which things trade at,” he said.

Momentum has everything to do with those prices, according to Ross.

“The interest rates are so low, there’s so much funds that need to get invested somewhere and it is impossible to get a yield,” Ross said.

Momentum can feed on itself because as asset prices appreciate investors think they got in on the right move and go in more. According to Ross, further hikes of the Fed’s interest rate could potentially take the wind out of bitcoin’s sails.

“There’s no fundamental reason for why bitcoin is going up, and there won’t be a fundamental reason for why it goes down,” he added. “It will be some catalyst or trigger and that could be the Fed raising interest rates.”

MI