Yerevan (CoinChapter.com) — Stellar fell on Wednesday, driven lower in parts due to its correlation with Bitcoin, the flagship cryptocurrency that also plunged as traders assessed the outcome of this month’s Federal Open Market Committee’s policy meeting.
The US central bank took a break from its “transitory inflation” outlook, with chairman Jerome Powell noting in his post-FOMC press conference that the ongoing price rises in the US might persist longer than they had anticipated. Powell also signaled two potential interest rate hikes by the end of 2023, almost a year earlier than planned.
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That sent Bitcoin, gold, and stocks lower while upping the bond yields higher. The sell-off sentiment also grappled with Stellar. The blockchain protocol’s native token XLM plunged more than 4 percent to near $0.322 around 2200 GMT.
The cryptocurrency market, in general, anticipates higher inflation to act as its bullish catalyst. Bulls believe that more investors would want to keep their assets away from currency and bond markets as steeper consumer prices return minimal yields. Instead, scarce assets like Bitcoin and gold would benefit as they present themselves as insurance.
Bitcoin-Stellar Correlation
Altcoins, which largely represent individual blockchain projects, tend to trend in the same direction as Bitcoin. That is due to heavy market speculation that prompts traders to place riskier trades in the altcoin market. Compared to Bitcoin, altcoins undergo wilder price fluctuations during a bull run, thereby increasing the probability of making richly overnight profits.
Meanwhile, during a bear market, such altcoins also tend to crash harder than Bitcoin. XLM, representing a long-standing blockchain project Stellar, jumped by more than 3,110 percent from its mid-March 2020 nadir of $0.025. It later wiped around 60 percent of those gains during Q2/2021, again after getting influenced by similar corrective declines in the Bitcoin market.
Now, Fed has clarified that it won’t tolerate higher inflation. That means it would hike rates, which, in turn, suck more US dollar liquidity out of the market. It would also make holding bonds an attractive alternative since higher rates provide stable, attractive yields.
That is particularly bearish for altcoins like XLM. Technically, the Stellar token is already hanging out near a crucial support level of $0.323. Breaking below the said price floor would expose XLM/USD to two potential downside targets: the 50-week simple moving average (~$0.26) and $0.21.
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Meanwhile, the silver-lining remains that Fed won’t hike rates anytime below 2023. Nevertheless, inflation would need to stay lower to ensure that the central bank won’t shift its tapering plans to, say, at the beginning of 2023 or 2022 itself. That would bring more losses to cryptocurrency markets on the whole, not just Stellar.
