Bitcoin drops to a three-month low, with analysts split on the impact of the Fed's tightening.

One analyst believes that worries of a lengthy bear market in equities and digital assets as a result of the Fed's tightening are exaggerated.

Bitcoin has continued to lose momentum after minutes from the Federal Reserve's December meeting, issued earlier this week, suggested that policy tightening may be accelerated.

According to CoinDesk statistics, the top cryptocurrency sank to $41,012 during Friday's Asian session, the lowest level since September 29 and bringing the weeklong loss to 12 percent.

After the Fed minutes indicated policymakers considered aggressive interest rate rises and a quicker pace of balance sheet adjustment, called quantitative tightening (QT) – the polar opposite of liquidity-boosting balance sheet expansion – the downward trend gained traction on Wednesday. The hawkish tone weighed on markets, with tech companies falling for the second day in a row on Thursday.

In a Telegram discussion with CoinDesk, Jeff Dorman, CIO at Arca, said, "Bitcoin has been trading as a risk-of/risk-off asset lately and looks to be leading stocks lower."

About $200 million in long bets have been liquidated in the last few hours, according to Laurent Kssis, a crypto exchange-traded fund (ETF) expert and director of CEC Capital. This has pushed the spot price down. Kssis went on to say that leverage is still high, and that a further dip below $40,000 is possible, especially if bond rates continue to climb as a result of the Fed's hawkish approach.

According to common belief, the Fed's intentions to reduce its balance sheet while simultaneously raising rates would result in extended asset price deflation.

“It’s time to evaluate the conviction you have in whether positive interest rates could damage equity portfolio and see further global downward pressures,” Kssis said. “A 60/40 equities-to-bonds portfolio mix means that if the 60% in equities declines, big fund managers automatically sell bonds to maintain the ratio.”

“So if the Fed allows equity prices to fall, it will increase the borrowing costs of the governments because as bond prices fall, yields rise !!! That could trigger more selling in BTC,” Kssis added.

The two-year treasury yield, which better reflects short-term interest rates and inflation predictions than the 10-year yield, hit a 22-month high of 0.87 percent on Thursday. According to TradingView, the short-term yield has more than quadrupled to 0.76 percent in the last quarter. If the US non-farm payrolls figures, which will be released at 13:30 UTC on Friday, reveal that the rate of job growth nearly quadrupled to 400,000 in December, as projected, yields might jump much more. This would lend credence to the Fed's recent hawkish shift.

According to Brent Donnelly, president at Spectra Markets, the macro story has got worse for crypto in the past few months. “Stay bearish crypto as Fed’s QT plan accelerates. The macro story has got even worse for crypto since I started talking about the crypto bear case in November,” Donnelly said in an analysis note shared on Twitter.

“Markets tend to view QT as the most risk-negative brand of tightening policy from the Fed because it’s the inverse of the aggressive monetary easing that triggers a Pavlovian “BUY EVERYTHING” reaction each time the Fed eases,” Donnelly said.

Some observers suggest otherwise. “The fears of a prolonged bear market in stocks and digital assets might be overblown as historically markets have remained resilient during tightening cycles,” Arca’s Dorman said.

Indeed, bitcoin stayed mostly bid during the majority of the previous tightening cycle, which lasted from December 2015 to December 2018. In the two years leading up to December 2017, the cryptocurrency rose from around $350 to over $20,000 before entering a year-long bear market.

Further, stock markets came under pressure in the final quarter of 2018 – after nearly two years of rate hikes, as Dorman said on Twitter.

“Bottom line -- the Fed raising rates is not what causes big, long-lasting market selloffs... its AFTER very long Fed hike cycles when markets typically face sustained declines and recessions happen,”