Fed Raises Interest Rate: How it Affects Your Crypto (2023)

TL;DR

• Inflation is still an issue as the Fed raises interest rates and creates turmoil in the crypto markets.
• This situation has positive and negative implications for the prices of digital assets.

Interest Rates and Markets

The U.S. economy has recovered to its pre-COVID levels since the pandemic caused a downward spiral.

Shuttering businesses and markets, the virus had effects beyond the health issues it posed. However, there is a serious concern about a recession this year as it continues to fight inflation.

One major method to combat economic issues is to increase the interest rate. Interest rates, while one of several economic indicators, are particularly crucial for financial markets.

Even the slightest changes can significantly influence the broader market. The Federal Reserve (Feds) had consistently raised rates for 10 consecutive months.

Many believed the fight against inflation ended when the Federal Reserve maintained interest rates in June.

That joy was short-lived, however. The Feds had already warned that that was just a respite. Its words came true in the July 26 meeting, where it raised the interest rate again.

But what does it have to do with the crypto market?

Cryptos and Interest Rates

Interest rates have a very close relationship with the crypto market. Like any investment, the changing interest rates force investors to reevaluate their position and portfolio.

Following are the top 3 effects of increased interest in the crypto market.

Decreased Demand

Like all commodities and high-risk investments, crypto sees an exodus during turbulent economics. Cryptocurrencies are nearly always touted as the perfect answer to inflation. 

The truth is a bit different from the angelic portrayal. Cryptocurrencies, presented as the perfect formula to hedge against dwindling income, are also notorious for being volatile. This puts them in the high-risk investment category – something that investors avoid in weaker economies.

Then there is the borrowing interest. Higher interest rates by the Feds mean borrowing cost jumps for people looking to get money to invest in cryptos.

This leads to an overall decrease in demand, resulting in lower prices of digital assets.

Higher Interests Mean Higher Volatility

Any increase by the Feds will not directly cause the crypto prices to shift. But the increase means a weaker currency. In the grander scheme of the global economy, a weaker Dollar means prices can shift significantly.

There are two effects: positive and negative. A weaker Dollar means increased prices of cryptos. Yet a shaky currency scares investors further and causes crypto prices to fall.

The result is increased volatility, with prices increasing too much and frequently for your average investor. Tie this with the decreased demand, and crypto can fall significantly.

This happened last July when the Feds said they would raise rates again. The crypto market faced a major slump following the news, while Bitcoin dipped below $25,000.

Increased Interest Leads to Increased Adoption

All is not bad for your crypto portfolio, though. Where there are negative effects of the rising interest rates on cryptos, there is a silver lining, too.

The public has always headed for commodities and other items that tend to retain their value as a means of hedging against inflation. Bullion, precious metals, and oil are major ways to go about it.

Over the years, cryptos (Bitcoin in particular) have become increasingly popular as a means of hedging. In fact, Bitcoin has outpaced gold in value increase.

Cryptocurrency is particularly important for people looking for long-term methods to fight inflation. With more people buying into crypto, this can have the opposite effect and help increase their prices in weaker economic situations.

With inflation coming down but interest rates hiked up, there are a lot of opportunities and risks in the crypto market. Will you hold on as a hedge, trade the longs and shorts, or liquidate to preserve wealth in a shaky market?