How The Fed's Interest Rate Hike Affects Crypto

This week has been quite the rough one for the cryptocurrency market. After enduring several days of consistently falling prices last week, we saw Monday come with even more bad news as coin prices took further tumbles.

To be fair, this drop in prices isn’t affecting just the crypto market. Traditional stocks are still seeing drops as well, many of which appear to have dated back to the past few weeks. It is the type of market correction that provides an opportunity for many people to buy the dip -  as well as the type of correction that also scares a lot of investors.

Right now, analysts believe that the market could be in for a long pullback. According to a recent forecast by CoinCodex, A clearly bearish sentiment coming from crypto investors. This shows that investor confidence in the crypto market is pretty weak, while coins are showing sell signals everywhere.

Blame The Federal Reserve

While the market is currently in a downturn, it is worth noting that price drops aren’t necessarily a new thing. In fact, the broader crypto market is riding a bearish wave that started as far back as November 2021.

Bitcoin’s BTC/USD price hasn’t hit the $50,000 mark since the end of December 2021. The last time that the leading price saw its $60,000 peg was November 18. A simple look at Bitcoin’s price chart will show that the asset has been in the middle of a bearish run that has so far extended to the later part of 2021.

However, even in the midst of this bearish run, there have been glimpses of hope. Months and February and March 2022 were positive for the market, with coin prices rising and assets delivering gains to investors.

Still, we’re in the midst of a bearish run right now, and all signs seem to point back to a single source - the Federal Reserve.

Last week, the Federal Reserve announced that it would raise interest rates by a staggering 0.5 per cent. According to analysts, the last time that the agency made such a drastic interest rate hike was in 2000 - a year when Bill Clinton was still in the White House and the digital asset space wasn’t even in existence yet.

The job of the Federal Reserve is to maintain the stability of the economy. It has several tools that help it to achieve this, and control over interest rates is one of them. During the coronavirus pandemic, the government - along with the Federal Reserve - introduced several measures to maintain economic strength. One of those was the introduction of relief programs for people and businesses.

Under initiatives like the Payment protection Program (PPP) and more, the government distributed over $1 trillion to individuals and businesses, allowing them to enjoy expanded financial support to get themselves through the pandemic. The increase in money circulation immediately benefited most people and companies because they finally had the chance to get more money and stay financially solvent.

As a fallout, more people had more money to invest and play with. In fact, some analysts even believe that this pandemic money distribution spree was part of what led to the rise in crypto prices towards the end of 2020. People had money to spend, and they did.

Fast forward to 2 years later, and we’re finally dealing with the consequences. Inflation in the United States stands at a massive 8.5 per cent, and the metric is expected to climb at the quickest pace in the past 4 decades. The Federal Reserve has now stepped in with interest rate hikes to reign things in.

The Opening Salvo

The entire point of raising interest rates is to make it more difficult for people and companies to borrow money. The point is to hit people’s spending habits and naturally reduce inflation without risking the rise in recession probabilities. However, that in itself won’t be easy to achieve.

Right now, there’s a significant chance that the interest rates could be raised even more. Fed Chairman Jerome Powell has ruled out bigger interest rate hikes, but at this point, nothing can be put past the government.

At the same time, the government isn’t just using interest rate hikes to affect peoples’ spending power. It is also selling bonds to reduce its balance sheet deficit - which amounts to about $9 trillion. This means that there’s less money circulating in the economy, and the Fed will be looking to better control peoples’ spending habits. Sadly, it also reduces the demand for assets like cryptocurrencies.

What Does This Mean For Crypto?

Right now, the increases in interest rates will be pretty bleak for the crypto market. At the same time, analysts expect that the market will remain choppy in the short term.

Already we’ve seen the crypto market struggle because people are more sceptical about putting their money in high-risk assets like crypto. And while cryptocurrencies have already proven to be a great store of value in the face of worsening economic situations, the inherent risk of these assets - as well as their volatility - is putting investors in a more sceptical position.

As explained earlier, analysts believe that the market could be in for a long pullback right now.

For investors, this could actually be good. Bear markets are a great time to buy the dip and wait for gains. And if the crypto market has shown anything, it is that prices eventually go up and investors get the gains they’ve been owed. Right now, it’s just a case of how patient you can be.

We’ve already had several bearish and bullish cycles in the crypto market. This will prove to be no different.