Bitcoin and cryptocurrency prices have soared over the last year, partly due to the U.S. Federal Reserve's policy of ultra-low interest rates and huge cash injections into the financial system.
Fed chair Jerome Powell, last week nominated for another four-year term by president Joe Biden, has overseen the biggest monetary stimulus program in U.S. history to help offset the catastrophic economic effects of the Covid-19 pandemic—with bitcoin and crypto prices booming along with the stock market and many other assets.
Now, billionaire crypto investor Mike Novogratz has warned Powell could trigger a bitcoin and crypto market meltdown in 2022 as he acts to curb runaway inflation that's leaped to a 30-year high.
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"We have inflation showing up, you know, in pretty bad ways in the U.S.," Novogratz, the chief executive of bitcoin and crypto-focused financial services company Galaxy Digital, told CNBC, asking: "Is the Fed going to have to move a little faster" to curb higher prices.
"That would slow all assets down. It would slow the NasdaqNDAQ down. It would slow crypto down, if we have to start raising rates much faster than we thought."
After slashing interest rates and launching huge stimulus programs at the beginning of the pandemic, central bankers around the world are under increasing pressure to act in the face of surging inflation.
In recent weeks, the Fed has trimmed its bond purchases, with minutes from its last monetary policy meeting revealing officials are considering further scaling back its quantitative easing measures.
Novogratz also warned "people are getting pretty bearish" on bitcoin and cryptocurrencies after the huge rallies over the last year, with the price of bitcoin up almost 200%, the ethereum price up 600% and the likes of ethereum rivals solana, Binance's BNB and cardano up many thousands of percent.
Meanwhile, other bitcoin and crypto market watchers have echoed Novogratz's concerns.
"[Last week we had] further evidence that bitcoin behaves more like a risk asset than an inflation hedge coming in the form of a sharp spike when the news broke that Biden had decided to renominate Jerome Powell—gold, in contrast, dropped," Noelle Acheson, head of market insights at digital prime broker Genesis, said in emailed comments.
"This links bitcoin to the outlook for real interest rates which, should they remain low or even negative for the short-term, would support further growth in risk assets. The risk is that real interest rates could rise to a level that starts to choke off growth and liquidity while hitting asset valuations in the broader market while providing a more attractive alternative."
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However, despite warning over the price of bitcoin, ethereum and other cryptocurrencies, Novogratz expects Wall Street and other major financial institutions will continue to pile into the bitcoin and crypto market after a stampede into the space this year.
"The amount of institutions Galaxy sees moving into this space is staggering," Novogratz said. A recent survey by Nickel Digital Asset Management found that 82% of institutional investors and wealth managers are planning to increase their cryptocurrency exposure through 2022 and into 2023.
"I was on the phone with one of the biggest sovereign wealth funds in the world today, and they've made the decision on a go-forward basis to start putting money into crypto," Novogratz added. "I've had the same conversations with big pension funds in the United States."
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