Analyzing the 6 May 2022 Market Crash

By William Lee, Chief Researcher, Huobi Research Institute

Cryptocurrencies and the S&P both tumbled shortly after the US stock market opened today. Bitcoin plunged more than $3,000, or 6.3%, in a short period of time. In the last 24 hours, according to Coinglass, more than 100,000 holders of Bitcoin saw a total of US$370 million in value erased.

(Bitcoin Price, source:Tradingview

The main reason for the market plunge was the Federal Reserve’s latest monetary policy announced the previous day. This took the form of a 50BP interest rate hike which has been postponed to June, to start the shrinking of the balance sheet. The move assuaged the market’s concerns about the 75BP interest rate hike and the shrinking of the balance sheet in May, which led to the rebound in the US stock market and cryptocurrencies the same day. However, the policy effect of a 50BP interest rate hike still cannot be ignored.

History shows that the 50BP interest rate hike in 1994 and 2000 produced different effects: the former achieved a soft landing of the US economy and maintained healthy economic growth; the latter punctured the stock market bubble and caused the U.S economy to fall into recession.

(Economic effects of two 50BP hikes in 1994 and 2000, source: Bloomberg)

The 1994 rate hike was successful for two main reasons: one was a precautionary advance rate hike, and the other was a stable external environment. The failure of the rate hike in 2000 was mainly due to the fact that the U.S. stock market was already volatile then, and the 9/11 terrorist attacks shook the security and market confidence of the U.S.

Compared with 1994 and 2000, the macroeconomic backdrop in 2022 is volatile and highly uncertain. At this time, the rate hike is no longer a precautionary move, similar to what took place in 1994. The impact of the COVID-19 and the Russian-Ukrainian war has amplified market uncertainties. More importantly,the stock market bubble is already at an advanced stage. As a result, the latest rate hike has seen severe consequences similar to what took place in 2000.

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