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How Will Rising Interest Rates Affect Cryptocurrency?

Higher interest rates are coming. The market already suspected they were on the way, but a speech last week from Federal Reserve Chairman Jerome Powell has confirmed that the central bank will indeed raise rates in March, and that the high inflation such a hike is intended to combat “will be prolonged.” So with the Fed already signaling in December that it planned three rate increases in 2022, the cryptocurrency market should brace itself for a parallel increase in risk aversion.

Yes, higher interest rates generally mean a lower appetite for high-risk/high-return assets such as cryptocurrencies. In theory, this should mean that the crypto market will experience declines in prices at various points this year, although increases are likely to be modest (e.g. 0.25% a pop), so may not dampen investor appetite for risk beyond the initial shock of each hike.

Still, with the stock market reacting badly to recent threats of hikes, and with the cryptocurrency market becoming increasingly correlated to stocks, crypto could be in for a bearish year because of the changing macroeconomic outlook.

Rate hikes

Here’s When the Fed Will Raise Interest Rates and Dampen the Crypto Market

While the Fed has indeed confirmed a rate rise in March, and has also suggested additional rises, it would be helpful to see the 2022 meeting schedule for the Federal Open Market Committee (which oversees rates). That way, traders and investors can prepare themselves for when hikes are likely to be confirmed.

  • January 25-26

  • March 15-16

  • May 3-4

  • June 14-15

  • July 26-27

  • September 20-21

  • November 1-2

  • December 13-14

There are seven more FOMC meetings penciled in for this year, so in theory we could have a maximum of seven rate increases. However, this is unlikely, while it’s also likely that the three rises that have been indicated by the Fed will come sooner rather than later, in order to counteract rising inflation.

Indeed, as of writing, inflation in the United States is at a 39-year high of 7%, meaning we basically have to go back to the era of stagflation to find a similar rate. Given that this figure has risen from 1.4% at the start of 2021, it seems a safe bet to say that the Fed will want to impose its three rate rises in each of its next three meetings.

This means that March 15-16, May 3-4 and June 14-15 will likely bring rate hikes, which in turn will have at least a short-term impact on the stock and cryptocurrency markets.

How Much of an Impact Will Hikes Have on the Market?

The question is: how much of an impact will hikes have? Well, looking at the recent market downturn, the rise in March (and subsequent hikes) could have a significant impact on bitcoin and the wider cryptocurrency market.

For instance, when the Federal Reserve met on January 26, BTC fell from about $38,000 to $35,600. This was a fall of about 6%, and it came in less than 24 hours.

In fact, the Fed’s negative impact on bitcoin and crypto stretches back further than this: on January 5, the FOMC released its December 14-15 minutes, in which it indicated that it was likely to increase rates in 2022. Following this publication, BTC sank from $46,500 to $43,200 in a few hours, before descending to $41,500 a couple of days later, representing a fall of around 10%.

And since the January 5 publication, BTC and crypto has been on a longer term downward spiral, with the cryptocurrency market losing 21.7% of its total value. In other words, the Fed’s increasing hawkishness has had an accumulative effect on crypto, depressing market sentiment in anticipation of an increasingly tight monetary policy.

Numerous analysts have identified the Fed’s bearish stance as the main factor in recent downswings, with Blockchain Coinvestors CEO Lou Kerner telling this author that it continues to wield power over the market.

“Tightening by central banks is the biggest macro issue driving both the stock and crypto markets today, which is why we’re seeing a very high correlation between the markets,” he said.

Put simply, the overall effect of three (or more) consecutive rate rises may be to increasingly weigh down bitcoin and crypto in general, ensuring that 2022 becomes a year of another cryptocurrency bear market. How far prices may actually fall is anyone’s guess, but with the crypto market falling by as much as 89% in the year between December 2017 and December 2018, the worst-case scenario could be very bad.

Of course, the market is different now than it was in 2017, so there’s an argument to be had that it will do a better job of preserving its highs. That said, some economists and analysts have recently predicted that higher rates of inflation will last longer than initially predicted, with Allianz’s Mohamed El-Erian arguing in late 2021 that high inflation will “last for a while,” and that the Fed is losing credibility over its (currently) soft policy.

Put differently, inflation may get worse before it gets better, with the Fed potentially forced to initiate more than three rate rises this year. If so, the effect on crypto could be substantial.

Counterpoint: Covid-19 Recovery Could Stabilize Inflation

However, despite the possibility of such a scenario, it’s still very hard to say with certainty just how likely it could be. Much of the current macroeconomic instability comes from the ongoing Covid-19 pandemic, with supply shocks largely responsible for rising prices. Such issues could stabilize over the coming months, causing inflation to fall away, and in turn the Fed to shy away from serious rate increases.

As things stand, the central bank is planning three rises of 0.25% each, meaning that the Federal Reserve funds rate will reach 1%. This is hardly a big figure, particularly when the effective rate was 2.4% as recently as July 2019, and as high as 19% back in 1981.

In fact, some analysts believe that bitcoin (if not other cryptocurrencies) will benefit from rate hikes. Writing in a January 11 newsletter for Bloomberg Intelligence, analyst Mike McGlone predicted that increases “may support a win-win scenario for Bitcoin vs. the stock market,” in that a 1% rate will likely have a bigger impact on stocks than on BTC, with McGlone citing its limited supply and the fact it’s in its “early adoption days” as the reason why bitcoin will fare better than equities.

McGlone is a noted bitcoin bull who has predicted a $100,000 price for BTC for several months now, so skeptics may raise their eyebrows at this forecast. But at the very least, it suggests that not everyone thinks higher interest rates will be a disaster for crypto, if they even come around.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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