Global authorities seem to have put forward the need for security measures around cryptocurrencies. With Federal Reserve, United States’ central bank, also entering the picture, investors would need to understand how it will impact the overall market. Potentially, low interest rates could enhance the demand for cryptocurrencies and the vice-versa.
In June, 2022, Federal Reserve decided to increase interest rates from one percent to 1.65%. The move caused Bitcoin’s value to fall below $20,000, as stated by CoinMarketCap, a cryptocurrency price-tracking website. The website further stated there’s a correlation between stock markets and cryptocurrencies. For example, an increase in interest rates decreases share prices, which result in a bearish impact on crypto tokens’ value. “I believe decisions of Federal Reserve regarding interest rates have both direct and indirect effects on cryptocurrencies. If Fed raises interest rates, it could lead to higher borrowing costs, which may affect demand and valuation of cryptocurrencies,” Rajagopal Menon, vice-president, WazirX, a cryptocurrency exchange, told FE Blockchain.
According to ZebPay, a cryptocurrency exchange, Federal Reserve has to maintain a two percent inflation rate with regard to its price stability mandate. Insights provided by the exchange mentioned that market prices increased on March 22, 2023. However, post that development, Federal Reserve increased its interest rate by 25 basis points which clocked a 7.9% fall in Bitcoin value. Experts believe that interest rate calls and their effect on the cryptocurrency market cannot be anticipated.
It seems that bull and bear periods in cryptocurrency markets have corresponded with loose monetary policy and tightening around it. S&P Global, a private banking company, highlighted that crypto assets can act as an inflation hedge. The company also emphasised on how relations between crypto ecosystem and macroeconomic factors could increase desire for more cryptocurrency-based investments. Reportedly, suggestions have been laid that integration between traditional finance and cryptocurrencies can dictate changes in interest rates.
“If Federal Reserve continues its loose monetary policy and keeps interest rates low, this could fuel interest in cryptocurrencies. Low rates make traditional investments less attractive, leading investors to explore cryptocurrencies. As a result, this could have a positive impact on the overall cryptocurrency market,” Sathvik Vishwanath, co-founder and CEO, Unocoin, a cryptocurrency exchange, concluded.
For 2023, factors which can influence Federal Reserve’s interest rates include regulatory updates, macroeconomic conditions, technological developments, among others. As per Phemex, a cryptocurrency exchange, investors should expect steady interest rate hikes for 2023. It’s considered that rate hikes can alter the overall cryptocurrency strategy from a risk-on to a risk-off approach, which can increase attractiveness around fixed-income investments.
“Despite uncertainties around Bitcoin at start of 2023, it was trading below the $17,000 mark. However, it has reached the $30,000 level. The current phase shouldn’t alter the long-term outlook of investors. Market participants expect Bitcoin’s price to recover, especially as more financial institutions express interest in Bitcoin-related financial instruments,” Edul Patel, co-founder and CEO, Mudrex, a crypto-investing platform, concluded.
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