If the 2022 crypto market bear run proved anything, it was that the trajectory of crypto and traditional stocks run more parallel to each other than previously thought. Generally speaking, when interest rates go down, the stock market moves up, and when the rates are hiked, the stock market goes down. Recently, interest rate hikes have affected the crypto market, with the values of several digital assets plummeting. With another interest rate hike underway, the stage is set for a major catalyst to determine the fate of crypto assets for the foreseeable future.
What Happens if Interest Rates Go Up?
Interest rates are the charge levied on entities that borrow assets and cash. When interest rates go up, the cost of borrowing money increases, making consumer goods and services more expensive. The effect it has on consumers is reduced spending and demand for goods and services. In most cases, increased interest rates slow down the economy. For many years, crypto assets have been considered the perfect investment for hedging against inflation, dollar devaluation, reduced purchasing power, and low-interest rates.
Nevertheless, this idea has recently proved false, as increased interest rates reduced investors’ appetites for high-risk assets like crypto. This was the case in 2021 and 2022 when the Fed aggressively hiked interest rates. Reduced demand for investment assets, including crypto, led to a protracted market bear run.
Related: Honouring Hagia Sophia: GLI Token Listing on CoinW and BitForex
The FOMC’s Decision
After the Federal Open Market Committee meeting on the 14th of June, 2023, the U.S. Federal Reserve temporarily declined to increase interest rates. This follows a streak of interest rate hikes over the last ten meetings, with the FOMC unanimously voting to hold the federal funds rate window at 5.00-5.25 per cent in June. The decision will hypothetically allow monetary tightening policies to weigh on the economy. However, a hike is expected to happen sooner rather than later, especially if inflation rates continue to increase. In fact, most committee members anticipate at least two more 25-basis point hikes before the end of the year. The rate hike “Skip”, for June is seen as a means to decelerate the tightening cycle rather than indicating an end to the cycle altogether.
What Do Interest Rate Hikes Mean for the Crypto Market?
Because of the links between the crypto and stock markets, a bearish trajectory for the stock market can result in a downturn for digital assets. Nevertheless, the most significant short-term effects of rate hikes are psychological, as investors liquidate crypto holdings in reaction to a stock market crash. Sometimes, the opposite is the case, such as the 7.9% Bitcoin price correction after the Federal Reserve announced a 25-basis point rate hike in March 2023. This indicates that the market has gotten used to rate hikes, as it retraces price corrections effectively, bringing it back to its former trading levels before the hike. In other words, the effect of rate hikes on crypto stocks may not be as profound as in previous months.
How Have Crypto Assets Performed in Light of a Potential Interest Rate Hike?
Crypto prices across the board, especially of Altcoins, slumped after it became clear that the Federal Reserve was contemplating the probability of resuming interest-rate hikes. This reaction is expected of risky assets, such as volatile cryptocurrency. Bitcoin was impacted, dropping below the $25,000 mark for the first time in months. Altcoins like Ether, Ripple, and Litecoin decreased by around 4.6%, 8%, and 6%, respectively. Nevertheless, many tokens have since rebounded, with Bitcoin poised to hit the $30,000 mark.
Read More: NFTs on OpenSea: Riding the Wave as Digital Asset Prices Dip
Conclusion
Experts predict that businesses should expect interest rates to remain high throughout 2023, with the Fed’s aggressive monetary policies likely making it difficult for consumers and businesses to secure loans. Given the historic correlation between crypto and traditional stocks, the cryptocurrency market is bound to feel the impact sooner or later. However, the effect of the interest hikes is equally expected to be felt less over time, as long-term price corrections dominate market proceedings. There will be some others cryptocurrency news – Huobi Cryptocurrency
Frequently Asked Questions
How Much Influence Does the Federal Reserve Have on the Financial Markets?
The Federal Reserve significantly impacts local and even international financial markets, with its monetary policies determining the economic outlook in both contexts. When they hike interest rates, the value of local goods and services goes up, reducing demand and lowering prices. Although such policies can slow the economy, it represents attractive buying opportunities for long-term investors.
Is It Possible to Predict Interest Rate Decisions?
The market has adapted to interest rates, resulting in a reduced impact on short-term prices. However, predicting interest rate decisions is tough, and anticipating their effects on the market is even more challenging. Nevertheless, investors can prepare themselves for any eventuality by striving to know the driving forces behind economies to understand better why markets move the way they do.
What Did the FOMC Decide in June 2023?
The FOMC sat to decide on whether or not to continue a lengthy trend of interest rate hikes and eventually settled on pausing rate hikes temporarily. Nevertheless, despite their unanimous decision, minutes from the meeting indicated that they weren’t united, with bias favouring a subsequent hike later in the year.