The Federal Reserve Just Delivered Fantastic News for Crypto Investors. Which Cryptos Should You Buy?

On July 1, new Federal Reserve Chair Kevin Warsh told a European central bank panel that "inflation risks have come down."

That single line sent the crypto market scrambling. Bitcoin (CRYPTO: BTC) reclaimed $60,000 more or less immediately, and the entire sector bumped upward.

But before treating Warsh's statement as the pivot out of the bear market that crypto has been waiting for, let's unpack the broader context of the comment and determine whether it's worth changing your portfolio's positioning.

Image source: Getty Images.

Read the fine print carefully here

Warsh spoke at the European Central Bank's (ECB) annual Sintra, Portugal, forum alongside ECB President Christine Lagarde. He explicitly declined to offer any insight regarding the next rate decision at the end of July.

That's a notable shift from his debut. On June 17, during his first press conference as the Fed Chair, he used the euphemism for hawkishness against inflation -- "price stability" -- numerous times and called the committee's commitment to price stability "unanimous and unambiguous," reinforcing the widely held expectation of at least one rate hike before year-end.

His latest comment is thus a bit surprising amid one of the biggest factors driving inflation right now, the U.S.-Israel war with Iran, which led to the closing of the Strait of Hormuz and preventing the flow of global energy. The conflict is still not fully resolved despite a tenuous ceasefire.

But at Sintra, he also called prices in the U.S. "too high." There's simply not much wiggle room to interpret that as being anything other than hawkish -- and he described the disinflationary artificial intelligence (AI) thesis as something he still wants to be "open-minded" about, not act on.

Which coins could catch the wind?

It isn't possible to predict how the Fed will act at its next meeting, but it's possible to game out a few new scenarios that weren't on the table before Warsh's latest, seemingly dovish turn (which may not last or predict how he will vote later).

Assume the doves at the Fed win, likely with the help of a more durable ceasefire that enables cargo to flow through the Strait and that rates are held steady or cut. That would lead to falling real yields, cheaper access to credit, and a weaker dollar. All that would push capital even further toward risk assets, beyond the ongoing risk bonanza happening in memory, semiconductor, and AI stocks. The crypto majors would benefit substantially.

Bitcoin tracks global liquidity more tightly than most major assets. Research by investor Lyn Alden shows the coin's correlation with the global M2 money supply is about 83% on a rolling-12-month basis. Rate cuts feed liquidity, liquidity feeds Bitcoin, and that means, in the big picture, cuts are good for the anchor asset of most crypto portfolios.

Ethereum (CRYPTO: ETH) sometimes behaves like Bitcoin, but with more torque. Speculative capital flowing on-chain boosts decentralized finance (DeFi) activity and could, in theory, tighten the coin's supply through a transaction-fee-burning mechanism. Its large DeFi ecosystem also tends to generate many more experimental projects during periods of high liquidity, some of which might become growth segments in its future.

Solana (CRYPTO: SOL) has a smaller ecosystem than Ethereum, but its ecosystem, which hosts meme coin launchpads and consumer apps, is heavily powered by retail investor speculation. Every time global liquidity rises, Solana has been where the party happens, with investors searching for the next cryptocurrency to explode.

Hyperliquid (CRYPTO: HYPE) is the most direct beneficiary. Its decentralized exchange (DEX) for perpetual futures, which are leveraged crypto contracts with no expiration date, routes nearly all of the protocol fees into open-market buybacks of its own token. More liquidity means more money for the volume of perpetual futures trading, which feeds a loop that directly benefits holders.

Don't jump the gun

Warsh is one of 12 Fed voters, and he could get outvoted in favor of implementing rate hikes. Don't go buying anything on one Sintra remark alone.

Watch the June Consumer Price Index report on July 14 and the Fed meeting on July 28-29, before taking any action. The new Fed chair has made it clear that the market will get fewer hints about what the Fed will do in the future, which means it's smart to be more careful about acting in advance of the Fed's actual decisions.

Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Hyperliquid, and Solana. The Motley Fool has a disclosure policy.