How Do Rising Rates Impact Crypto Prices?

Protect your crypto portfolio as rates rise

Recently, interest rates in the United States have continued to increase. The Chicago Mercantile Exchange Group also expects the government to increase its interest rate after the Federal Open Market Committee meeting on the 4th of May, 2022.

This is the first time the government has increased its interest rates since March 2018. However, there are speculations that there will be more changes in the coming months. The government will try to curb inflation by increasing the Fed rate.

The rising rates will affect lenders and borrowers differently. The speculative asset market (commodities, stock, cryptocurrency, etc.) will also experience the effect of rising rates in the country. This article dives into how the change in interest rates will impact the price of cryptocurrencies.

Why is the Inflation Rate Increased?

The first spike in the inflation rate that raised concerns came at the start of 2021 when it hit 1.4%. Several activities played a role in the rise of the inflation rate, but the last straw that broke the camel’s back came during the global lockdown.

The government initiated two strategies to provide for her citizens - an expansionary monetary policy and a fiscal policy. The expansionary monetary policy reduced the interest rate to its barest minimum. Many people could afford to collect loans since they must pay little or nothing as interest. The fiscal policy was a generous gesture from the government. Social benefits were provided for citizens to alleviate the dire effect of the immediate lockdown.

These two policies increased the supply of money in the economy and a time when there was no economic growth. Surplus funds created an imbalance in the already stagnant economy, which increased the price of goods and services. As soon as the lockdown was relaxed, US GDP soared to 33.8% from a negative streak in the previous two quarters. However, surplus money was still in the hands of citizens, and following the law of supply, the price of goods and services also skyrocketed, leading to an increase in the inflation rate.

When should we expect to see a change in the Crypto Market?

In March 2022, the Federal Reserve announced that there would be an increase in interest rates. However, the Federal Open Market Committee decides these rates, and the committee has six meetings lined up for the rest of 2022. Cryptocurrency investors and traders have to be on the lookout for the outcomes of each of these meetings.

The first meeting will be held on the 3rd and 4th of May. This meeting is the first since the announcement in March, and it will be the pioneer event that will affect crypto prices. The other FOMC meeting dates are as follows; June 14 & 15, July 26 &27, September 20 & 21, November 1 & 2, and December 13 & 14. It would be impossible to tell how many of these meetings will impact crypto prices. However, the Federal Reserve also stated that there would be at least three rises, and they would come sooner than expected so that the government could quickly combat inflation.

According to data from Trading Economics, the US inflation rate has hit 8.5%. It started rising in January 2022 when it was at 7%. In February, the figure climbed to 7.9%, and if care is not taken, it will snowball into stagnation. Following these statistics, it is typical to assume that the first three meetings of the FOMC will have an immediate effect on the stock, cryptocurrency, and the asset market in general.

Possible Effects of the Rising Rates on Crypto Prices

The rising interest rates will change the risk-reward ratio for large investors, like hedge funds, responsible for moving the market. These movers will divert most of their investments into lower-risk investments like bonds and drain liquid from high-risk assets like stocks and cryptocurrency.

This transition from high to low-risk assets has already begun, although they can also be interpreted as reversion in the stock market. Bitcoin and its altcoins have seen a price drop compared to their 2021 value. Bitcoin fell off about 38%, ETH went down 35%, and according to CoinGecko, the total cryptocurrency market cap was reduced by 36%.

Cryptocurrency defies every conventional technology, and it is normal to see people acting unconventionally towards this market. The actions of investors leading to a dip in crypto prices can be countered by the actions of investors who are still bullish on cryptocurrency and blockchain technology. As rates rise, it will be interesting to see if crypto moves in tandem with the overall market.

When a startup raises more capital than necessary, the excess is burned in the traditional world. The burning implies that the company will have to borrow in the future, but the situation is different on the blockchain. In terms of traditional financing, it is hard to explain how blockchain works, so it will be hard to tell how the rising interest rates will affect borrowing for blockchain organizations since they are shielded from a direct impact on lending.

Conclusion

There is much optimism about how crypto can counter the traditional effects of increased interest rates. Staking profit and yield pools can be used to fund projects that require financing on the blockchain so that crypto prices can remain stable despite the new interest rates. If this happens, it may affect the internal fragility of the UST stablecoin.