With the rise in interest rates, the financial sector has faced many changes-both positive and negative. Higher interest rates have different kinds of impacts on different types of sectors. Whereas the growth in the interest is beneficial to certain sectors, it can be harmful to other sectors. One such sector is the cryptocurrency market which fuels investments and trading. Let’s understand how higher interest rates affect cryptocurrency markets.
Higher interest rates are not necessarily a positive thing for the cryptocurrency markets. Higher interest rates bring in a lower inclination towards high-risk assets such as the cryptocurrency markets. An important fact to be noted is that the interest rates affect borrowers negatively, but they also reward lenders with higher returns and profits. The increase in rates also affects the risk-reward calculations for many investors, especially investors like hedge funds. The higher interest rates are also one of the main reasons why the cryptocurrency market is not doing too well this year. The crypto market surely reached new heights in the last year but it is yet to leave a significant mark this year. These rates have also caused the activity in the cryptocurrency markets to slow down.
The cryptocurrency market allows you to take interest in your investments, thus catering to the investors. The higher interest rates, in this case, have a positive impact. It also allows you to secure your coins and contribute to the securing of the network which is caused due to the proof-of-stake mechanism. The people who participate in this scheme are rewarded in the form of block rewards (the number of crypto coins you get if you successfully mine a block of the currency). This method is considered quite eco-friendly which is quite contrary to the proof-of-work mechanism that is followed by Bitcoin.
The cryptocurrency market maintains a close relationship with the stocks in the stock market. The stock market tends to react negatively toward interest rate hikes. Since there is an established correlation between the stock market and the cryptocurrency market, the cryptocurrency market is also affected. This is mainly due to the evolving macroeconomic prospect.
Now that we have established that the interest rates do affect the cryptocurrency market and that the interest rates affect the crypto market both positively and negatively for different types of users, let’s understand how higher interest rates affect cryptocurrency markets quantitatively.
Bitcoin is known to be a crypto coin to benefits from low-interest rates. Thus, in January, Bitcoin’s price fell from 38,000 US dollars to 35,000 US dollars. This fall of about 6% took 24 hours to take effect.
In addition to the interest rates, the Federal Reserve also harmed bitcoin and the cryptocurrency market. In January, the FOMC (Federal Open Market Committee) implied that the interest rates would hike up in 2022. Due to this announcement, the rate of Bitcoin then fell from 46,500 US dollars to 43,200 US dollars in the span of a few hours, which then eventually fell again to an amount of 41,500 US dollars a couple of days later. This was about a 10% fall in the prices. This price drop caused doubt in many investors.
Ever since the implication was made, Bitcoin and the cryptocurrency market have faced quite an ill-fate with the cryptocurrency market’s value falling almost 21.7%.
The combined effect of three (or more) consecutive rate rises may bring down the value of Bitcoin and the whole cryptocurrency market by a lot. Any further damages to the market may lead to the total collapse of the market.