Bitcoin bounces back and beats technology. Watch out for the Fed.

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Bitcoin has recently been shown to be correlated with other risky assets, such as high growth stocks. Rutmer Visser/Dreamstime

Bitcoin and other cryptocurrencies rose on Wednesday, rebounding from a selloff that began late last week. There is optimism that the worst is over, but an imminent decision on Federal Reserve monetary policy remains a risk.

Bitcoin, the leading digital asset, has risen more than 4% in the past 24 hours to around $38,000, according to data from CoinDesk. It had traded close to $33,000 at Monday’s deepest selloff, but broke above $43,000 less than a week ago.

The small Ether pair was also higher, up more than 4% to surpass $2,500. The token that underpins the Ethereum blockchain network bottomed near $2,150 on Monday and hit $3,250 last Friday.

Bitcoin and Ether remain far from the all-time highs of $68,990 and $4,865, respectively, hit in early November.

Smaller cryptos or “altcoins” like Ripple, Cardano, and Solana showed similar price action: up 3% to 5% from Tuesday in a steady rise from Monday lows. The wildly popular “meme” token Dogecoin soared over 11%.

“After a few days of stabilization around the $35,000 level, Bitcoin traders are increasingly confident that the bloodbath may be over,” said Edward Moya, analyst at brokerage Oanda.

“Optimism is brewing after this massive sell off of risky assets in the market,” Moya added. “If Bitcoin manages to rally back to $40,000 over the next few trading days, that would be a very positive sign for the cryptoverse.”

Cryptocurrencies came under heavy pressure late last week when Russia’s central bank proposed a ban on cryptocurrency mining and trading, in a country where both activities are relatively popular.

Yet the biggest challenge for cryptos recently is that they have been found to be essentially correlated with other risk-sensitive investments, such as high-growth stocks in the tech sector.

In theory, Bitcoin and its peers should trade independently from traditional financial markets. However, as with equities, the prospect of higher interest rates and lower liquidity due to central bank policy rocked the boat.

The tech-heavy Nasdaq Composite is firmly in correction territory, down more than 14% year-to-date.

Tuesday’s action in the digital asset space versus stocks was “very promising for many crypto traders,” Moya said. While the Nasdaq was down another 2.3% on the day, cryptocurrencies held firm or rose.

Tuesday’s upside move came despite a series of negative news headlines, Moya noted, as the International Monetary Fund reiterated that El Salvador’s use of bitcoin as legal tender posed a significant risk. There was also news that Kazakhstan would keep crypto miners out of power for the rest of January amid civil unrest.

Wednesday could see a return to more volatility or signal that digital assets may rise again.

The two-day monthly meeting of the Federal Reserve’s monetary policy group – the Federal Open Market Committee (FOMC) – ends and Fed Chairman Jerome Powell will make a statement. Anxiety over the central bank’s messages was at the heart of Tuesday’s stock decline, so investors will be watching Powell’s statement closely.

“With Fed policy so strongly boosting risk assets in recent weeks, this opens up an interesting day of communications ahead for the FOMC,” said Deutsche Bank strategist Jim Reid.

Traders expect four interest rate hikes from the Fed in the coming year, the first in March, before quantitative tightening in the form of central bank balance sheet reduction . Any indication that bigger or bigger interest rate hikes are coming, or that a tightening will happen faster than expected, could rattle the stock market.

Bitcoin and other digital assets continued to rise on Tuesday despite the volatility in stocks. Should equities experience another rough patch in the face of the Fed’s decision on Wednesday, all eyes will once again be on the crypto’s reaction. Continued relative strength would be good news.

“If the broader risk appetite suffers, I expect Bitcoin to suffer more,” Moya said. “Whether that will see it test the crucial $30,000 region only time will tell, but traders will be very relieved at what they have seen this week.”

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