Any country’s central bank can set interest rates to any level to achieve certain goals for monetary policy. The increase or decrease affects different sectors in the financial market; it can be negative or positive, depending on the nature of the business or market. The cryptocurrency market, being one of the important pillars of the financial industry, is also affected by fluctuating interest rates.
Interest rate hikes and cryptocurrency market dynamics are co-related. Increasing interest rates triggers the fear of losing, as many economists see this trend in the monetary policy as a sign of economic recession. This factor adversely impacts the overall market cap of the cryptocurrency market.
Introduction
A high-interest rate means the cost of getting money from the Banks becomes high. High rates impact investments, borrowing from banks, and returns from debt instruments, stocks, and other financial and non-financial markets. In this scenario, demand for high-risk assets becomes low, and investors prefer to save money in the Banks and other financial institutions as they will be getting good profits on their fixed deposits and saving accounts. The money supply gets low, and short-term investors in the crypto market try to exit from the trading markets. In other words, with the Interest Rate Hikes and Cryptocurrency market uncertainty, investors prefer to keep their money in the Banks. What happens when interest rate raises are too quick?
“Higher rates generally lower appetite for riskier investments, which is likely one of the causes for a significant pullback in digital asset prices over the last year,” Brian Spinelli (Co-Chief Investment Officer at Halbert Hargrove).
TradingView shows the interest rate hikes and cryptocurrency market crash.
Contributing Factors to Interest Rate Hike and Cryptocurrency Dynamics: 3 Key Causes
Inflation
Inflation is considered one of the top reasons for rising interest rates. The Central Bank will keep the money supply restricted and keep the interest rate at a high level. Generally, a larger money supply means more borrowing, investments, and employment. Inflation impacts the spending level of goods and services, leading to high demand and increased inflation. Such monetary policies bridge the demand-supply gap, a key reason for high inflation, affecting Interest Rate Hikes and Cryptocurrency market.
Exchange Rate
High interest rates attract more foreign currency to park in the country’s financial system, which may help stabilize the exchange rate. Many countries, at any point in time, face currency devaluation due to multiple factors, and to curb this, the central bank may elevate the base rate as a core monetary policy strategy.
Economic Growth
The fiscal year’s target for economic growth will hint to investors regarding critical monetary policy decisions, including interest rates. If the government seeks aggressive growth, the base rates will bend lower for capital inflow from inside and external investors. Annual economic growth targets are established based on various factors, specifically revenue targets, external debt payments, and unemployment rates. These macroeconomic factors can help us predict interest rate hikes and cryptocurrency market trends.
Effects of Interest Rate Hike on Cryptocurrency
Past Events
The cryptocurrency market is always difficult to predict. The market responds with the prediction of upcoming Fed decisions. For example, in May 2022, a substantial hike in interest rates was expected, causing bearish sentiments in the market. However, bitcoin rose to $40,000 after the Fed rejected the high interest rate jumps. Interestingly, it was the highest hike in 20 years, and the market did not react negatively as the experts had predicted, contributing to an inversely proportional relationship between Interest Rate Hikes and Cryptocurrency. Learn more about this interesting event.
In another event in March 2023, interest rate hikes and cryptocurrency market showed their correlation; the bitcoin price fell after the Fed raised the interest rate by 25 basis points (bps).
The expected vs. actual interest rate hike was quite similar; therefore, The price decline was insignificant, and Jerome Powell had signaled no additional hike in upcoming FOMC meetings.
| FOMC Meeting Date | Rate Change (bps) | Federal Funds Rate |
| 26-Jul-23 | 25 | 5.25% to 5.50% |
| 3-May-23 | 25 | 5.00% to 5.25% |
| 22-Mar-23 | 25 | 4.75% to 5.00% |
| 1-Feb-23 | 25 | 4.50% to 4.75% |
| 14-Dec-22 | 50 | 4.25% to 4.50% |
| 2-Nov-22 | 75 | 3.75% to 4.00% |
| 21-Sep-22 | 75 | 3.00% to 3.25% |
| 27-Jul-22 | 75 | 2.25% to 2.50% |
| 16-Jun-22 | 75 | 1.50% to 1.75% |
| 5-May-22 | 50 | 0.75% to 1.00% |
| 17-Mar-22 | 25 | 0.25% to 0.50% |
Impact of Liquidity
Liquidity level indicates the ease of converting an asset into cash without losing value. The more value it loses, the less liquid the asset will be. In case of fluctuation in interest rates, the investors’ confidence in the risk assets decreases, ultimately hitting the liquidity. Top cryptocurrency exchanges usually launch programs that keep the investors and traders connected to balance liquidity. Unpredicted changes in liquidity have an impact on Interest rate hikes and Cryptocurrency.
Strategies to Adopt to Cater Interest Rate Hikes and Cryptocurrency Market Uncertainty
Diversification
A famous centuries-old saying, “Do not put all your eggs in one basket,” tells us to diversify our portfolio and take calculated risks. Keep your investment in different buckets of associated risk based on your risk appetite. This strategy will keep you in business for the long term.
Take Safe Haven in Stable Coins
During Interest Rate Hikes and Cryptocurrency uncertainty, keep a part of your portfolio in stablecoins. Stablecoins will help you to get back into trading into any coin on a golden time on short notice.
Detailed guide on stablecoins, their types, functions, and related regulatory concerns.
Real-Time Market Watch
Keep updated on the developing CPI index, which is key in determining the inflation figure. These figures are the key decision-makers in determining internet rates. Also, monitor the economic conditions, market sentiments, and business news. This practice will enable you to make the right decision at the correct time.
Subscribe to the droomdroom to keep real-time market watch in the world of crypto and web3.
Keep Going for a Long Term
Instead of quickly reacting to the sudden changing landscape, a part of the investment can be for the long-term. Do deep research to know a certain coin’s technological solution and calculate this long-term impact.
A quick read to learn about the term HODL and its usage in the crypto community.
Conclusion
Crypto enthusiasts termed Bitcoin “Digital Gold,” but the various events have shown the lack of crypto’s ability to keep itself as a store of value like other stable assets with intrinsic value. The interest rate is one of the macroeconomic factors that can affect the financial market, including cryptocurrency. Since the crypto market is still in the developing phase, in the future, unlike traditional markets, technological advancement can retaliate against macroeconomic factors’ impact of interest rate hikes and cryptocurrency market fluctuation.
