Fed Interest Rate Hiked: How Did It Impact Crypto Market?

Since January 2022, The Federal Reserve (Fed) has increased interest rates for the third time this year and the largest one since 1994. However, this did not result in a double-digit shock to the cryptocurrency markets; rather, after the announcements, cryptocurrency prices surged. 

If the Fed’s interest rate is still a strange concept to you, don’t skip this article because right now Tokenize Xchange will explain the reasons why the Fed raised the interest rate and the impact of interest rate hikes on the cryptocurrency market.

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Why Fed raised the interest rate?

On June 16, the US Federal Reserve announced an increase in interest rates by 75 percentage points.

So, what is the reason for Fed’s raising the interest rate? 

The primary mission of the Federal Reserve is to keep the US economy stable. When the economy booms and heats up, inflation and asset bubbles can get out of control, threatening the economy’s stability, that’s when the Fed stepped in and raised interest rates.

By raising the interest rate, it helped to cool the economy and maintain growth. Under its accommodative monetary policy effort, the US Federal Reserve was trying to fight inflation by raising short-term interest rates to reduce spending in the US economy. 

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At their meeting last month, Federal Reserve officials expressed concern that consumers were becoming more and more prepared for greater inflation and suggested that substantially higher interest rates might be required to contain price increases.

Due to the Fed’s decision, demand for products and services is expected to decrease. It will become more difficult to borrow money as interest rates rise, so people won’t be able to spend as much as before due to the dwindling liquidity situation. In short, Fed lifted the interest rate to control inflation in the US and an economic crisis that might happen in the future.  

How Fed’s interest rate impacts the Crypto market

Bitcoin price had a strong fluctuation in the price range from $20,500 to $22,000 before Fed’s interest rate hike, then on the afternoon of June 16, Bitcoin price dropped to US$20,000. A few days later, Bitcoin price plummeted to below $18,000 on Jun 20th. 

That may sound terrible for the market, however, if we take a close look at the Bitcoin price chart, we might see the situation is not actually bad. Before the Fed’s statement, Bitcoin comfortably traded inside the intraday trading range.

This appears to be true for all cryptocurrency exchanges as well as the larger cryptocurrency market, which was down more than 3% the day before the FOMC decision and remained basically unchanged after it. However, after Jun 19th, Bitcoin started to recover. On the day of writing, BTC price reached $21,600 on Jul 9th. 

So, the answer is, Fed’s interest rate hike did not have a strong impact on the crypto market. In fact, in the face of increased rates, two other significant asset types have reacted differently. While the value of cryptocurrencies has fallen along with other risky assets, several commodities, such as oil, wheat, and nickel, have increased sharply. However, these changes would not make a sharp difference to crypto prices and the market in general.

So, will these actions only be temporary?

Will the impact of the Fed’s interest rate on crypto be long-term?

‘Crypto-assets had been seen as an inflation hedge, but recently they have acted more like other risk assets such as stocks,’ says Tucker, Caleb Tucker, director of the portfolio strategy at Merit Financial Advisors in the Atlanta area. ‘Higher rates will be a headwind for crypto assets going forward.’

Indeed, when the Fed stated in November that it would start to taper its bond purchases and hinted that higher interest rates were about to be applied, cryptocurrencies reacted to the decreased liquidity in the same way as other risky assets, plummeting.

While many industry insiders now predict that the cryptocurrency market will suffer in the immediate future, many are more positive about the long-term trajectory of the digital assets and believe that they will recover once inflation is more under control.

In fact, after making a clear breakthrough above $20,500 on 7th July, BTC price began to rise steadily and reached 22,300 on 8th July. It showed a slow recovery of the crypto market

Bottom line

Though Fed’s raising interest rate had a negative effect on the crypto market in a short term, we can keep holding the view that during a downturn, weak projects should be eliminated and the market, in general, will steadily recover. Hence, given that blockchain-based initiatives are becoming more applicable in daily life and that cryptocurrencies will see rapid acceptance, it is critical to adopt a long-term perspective of cryptocurrency.