How Does The Hike in Interest Rates Affect the Crypto Market?

Published February 5th, 2022 - 07:00 GMT
How Does The Hike in Interest Rates Affect the Crypto Market?
Some of you might be scratching their heads saying why do the cryptocurrency markets, which we have been told over and over by analysts that they don't behave like the stock markets, are also reacting to this news? (Shutterstock)
Highlights
Though on paper, the Fed reserve decided to take the high road and postpone the hike of interest rates to March, unfortunately, the bears had other plans and the nervous crypto markets failed to re-enter the positive zone.

US regulators and lawmakers have been very interested in crypto markets lately. With the White House preparing to regulate crypto as a ‘matter of national security’, this regulatory uncertainty sparked the recent market dip.

But that was not it, what really set off this massive liquidation event that sent the price of these assets into free fall is the fact that the Fed reserve bank is threatening the markets with hiking interest rates and withdrawing stimulus from the markets as a panacea to inflation. A move that raised a few eyebrows.

Why does Interest Rate Affect Crypto Markets?

Interest Rate and crypto

Based on the rumors of such hawkish intentions of dialing back their policy sent the stock markets as well as the crypto market into a downward spiral. Some of you might be scratching their heads saying why do the cryptocurrency markets, which we have been told over and over by analysts that they don't behave like the stock markets, are also reacting to this news? Well, the short answer is that most people who invest in crypto have also invested in the stock market. So when panic happens in one, the other will see similar amplified anxieties.

Though on paper, the Fed reserve decided to take the high road and postpone the hike of interest rates to March, unfortunately, the bears had other plans and the nervous crypto markets failed to re-enter the positive zone.

Will The Hike of Interest Rates Crash the Crypto Markets?

It takes no charts expert to conclude that the cryptocurrency market is bearish but price aside, bitcoin has a deinflatory nature and is considered a “safe haven”; that’s why it’s called the digital gold; so people buy bitcoin as a long term hedge against inflation. The notable thing here is that with interest rates rising up fast all of a sudden, the pie in the sky and any long-term goals don’t look as tempting as they did before. And everyone would want to have a wad of cash under the mattress in case of any emergencies. Subsequently, bitcoin and other crypto assets will have the same sour reaction as the stock market. 

That being said, the Managing partner of Fundstrat Global Advisors, Thomas Lee, deeply believes that the first truly digital currency has a negative correlation with the US Dollar. Lee argues that any raise in the interest rates will strengthen the dollar, which in turn will have a negative effect on bitcoin.

“Fed moves have an impact on the dollar, then this has an impact on bitcoin. we observed Fed rate hikes in 2018 that supported the dollar and lowered bitcoin.” Lee says.

So our read of the markets is that any hike in the interest rates will result in more tumbles in the crypto markets.


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