Bitcoin has limited upside in the fourth quarter as the possibility of higher rates casts a shadow over crypto

Published Fri, Sep 29 20239:50 AM EDTUpdated Thu, Oct 5 20231:55 PM EDT

Patient bitcoin investors may have to hold their composure for at least another quarter as the Federal Reserve's outlook on interest rate policy dampens what might have been an even stronger month for the cryptocurrency. Bitcoin has had a difficult but decent year so far. The flagship cryptocurrency is up more than 60% for the year, according to Coin Metrics, thanks to a big run up in the first quarter. Not much has happened since, however. Bitcoin is down about 5% since April 1, and subsequent gains from any of several positive developments in the industry this year – like Ripple's win in the SEC's lawsuit against it, Grayscale's victory in its SEC suit, and several financial giants putting their names in the hat for a bitcoin ETF – have failed to hold. In the final quarter of the year, bitcoin is likely to see continued chop and although there's room for some upside, it may be limited. "If we have positive ETF developments, I could see us going back to the top of the range that we saw this year," said Greg Magadini, director of derivatives at crypto data provider Amberdata. Bitcoin has traded in a narrow range of between $25,000 and $30,000 since about March. A bitcoin ETF getting the green light is widely regarded as a key event that would push bitcoin to a new high and bring liquidity and trading volumes back into crypto. Read more from CNBC Pro's Quarterly Investment Guide Wall Street sees the market's bumpy ride continuing in the 4th quarter. Here are the risks in store Danger, 'pothole' ahead: Economic growth slowing to a near-halt to end the year Oil prices and the dollar surged in the third quarter. These ETFs can help you reset your portfolio After a rough third quarter, here's what to expect from technology stocks into the end of 2023 These underperforming stocks are due for a fourth-quarter comeback, according to Wall Street Supply cuts from Saudi Arabia remain price drivers for oil heading into the fourth quarter "One of the big problems with us breaking out into new high territories is we still have this backdrop of a hawkish Fed that's dragging on risk assets across the board," he added. "A crypto-specific catalyst could bring us up to the top of that range, but the macro is still a headwind. That probably prevents us from breaking to new highs on the year." Last week, at the conclusion of the Federal Reserve's September policy meeting, the central bank hit pause on rate hikes but indicated it could hold rates at higher levels for longer than previously thought. Rob Ginsberg, a chart analyst at Wolfe Research, said he wouldn't be surprised to see bitcoin break below $25,000, a key support level for the cryptocurrency, when rates break out to new cycle highs. When the Fed pivots on rate hikes, investors could expect a "violent" rotation back into risk , he said. Still, bitcoin is currently on pace to end September, typically its worst month of the year, up more than 3%. That would mark its first positive month in the quarter. Typically, it has ended the month in the red in eight of the last 10 years, according to CoinGlass. Despite this, it remains on pace for an 11% decline in the third quarter, historically a weaker quarter for the cryptocurrency. That would make it its sixth third-quarter loss in 11 years. Bitcoin is entering a historically upbeat period. The cryptocurrency has posted a monthly gain in eight out of the last 10 Octobers and a fourth-quarter gain in six of the last 10 years. Blame it on interest rates In a year when the Fed has continued to raise rates – and following a year when its rate hiking drove much of bitcoin's price – inflation data and monetary policy haven't been big drivers for bitcoin the way industry-specific catalysts have been. That influence may be back in play in Q4, however, after it hinted at higher rates for longer last week. "The Fed has put markets and the economy in conservation mode by forcing investors to make hard choices with their money, and it reminded us last week that they may not switch back to innovation mode any time soon," said Callie Cox, analyst at investment company eToro. "People are more concerned about protecting their portfolios than taking a shot at the next, hot thing in crypto. That's weighed on trading volumes, liquidity and speculation within the industry." With bitcoin as the digital gold play for investors and ether as the crypto tech play, higher rates could continue to weigh more heavily on ether, which is up about half as much as bitcoin in 2023 and on pace to post a more than 13% loss for the quarter. Meanwhile, holding a non-yielding asset like gold or bitcoin could become "less interesting" as rates go higher, Amberdata's Magadini said. BTC.CM= ETH.CM= YTD mountain Bitcoin's biggest gains may be in for the year, but there's still some room for more limited upside in Q4. But that could be good for bitcoin, which is sitting in the middle of a shift from speculative to quality investments, according to Cox. While bitcoin as a risky investment to traditional-minded investors lining it up against stocks and bonds, for the crypto-focused investor, bitcoin is a relatively stable store of value and a hedge against the traditional financial system, which has shown cracks this year that supported that narrative. There's a significant crowd on both sides, Cox said – "that's why bitcoin is up 60% in a year when the Fed has hiked interest rates so aggressively." "Bitcoin is at levels where it could struggle technically, but in a weird way, you may continue to see money flow into well-known cryptocurrencies because of the focus on quality," said Cox. "That's the story of the fourth quarter: how does the appetite for quality collide with the appetite for speculation? The answer to that depends on interest rates, which will probably stay high."