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What Higher Interest Rates Mean for Crypto

The United States Federal Reserve (Fed) raised its benchmark interest rate by 0.25 percentage points yesterday in an attempt to contain the rising inflation levels which reached their highest point in four decades.

The decision marked the first interest hike in four years. Two years ago, at the beginning of the global pandemic, the U.S. central bank cut the rate to almost zero percent in order to support the economy, which was suffering heavy disruption and losses. 

However, the growing prices of oil and gas have, ironically, fueled inflation, which is expected to grow further due to Russia’s war in Ukraine; and the world’s economies are already feeling the effects.

Now the interest rates are being raised from 0.25%, to a range of 0.25-0.50%. Furthermore, Federal officials are planning to increase the interest rate to 2% by the end of the year. Raising interest rates means that the central bank is increasing the cost of borrowing funds, thus creating an extra barrier for spending and reducing the corresponding inflation.

But what does this means for the crypto, and how will it affect digital assets, which are commonly considered extremely risky? 

What Do Experts Say?

The crypto markets have thus far positively reacted to the Fed’s decision, and uncertainty levels have decreased while prices recovered. In an interview with CNBC, Joseph Orsini, director of research at Eaglebrook Advisors, said:

“Markets have looked forward to Fed’s path and process of normalization for months now. What we’re seeing is positive risk-reward to the upside.” 

According to analysts, Bitcoin and other digital assets are capable of remaining resilient in an environment of rising rates. Orsini referred to a similar situation in the past when Bitcoinl managed to grow by 2000% in 2015 and 2016 despite the interest rate-hiking environment.

However, a bigger concern for Bitcoin’s price growth than rate-hikes is the general economic slowdown, says Orsini. Inflation, gas and product prices are still high and have the potential to lower the broader appetite for risk assets, and may thus act as a “marginal headwind to bitcoin.”

In the meantime, popular crypto investor, entrepreneur and influencer Anthony Pompliano criticized the Fed’s decision to raise interest rates by 0.25 percentage points. 

According to him, people expected to Fed to fight the inflation with a bazooka, or at least twice higher interest rates than offered. The current changes are only a step on the path to addressing inflation, he asserted, adding: “I fear that it is not going to be anywhere near what we’re gonna need.”

Meanwhile, Matt Hougan, chief investment officer at ‘Bitwise Asset Managementremarked that “rising rates are like a wet blanket on crypto.” According to him, this decision, and the ongoing inflation issues, may cause investors to look for less-risky investment assets than the still highly volatile digital currencies.

Despite this, he sees the long-term trends and fundamentals supporting the price of Bitcoin as “incredibly intact.” “The number of people working in the ecosystem, the regulatory trends, the new types of investors that are coming in, the applications, concerns about inflation, there are fundamental drivers of bitcoin to support the substantially higher price,” highlighted Hougan. 

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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Author

Simona is a fintech journalist and content editor at DailyCoin Academy, which focuses on educating new crypto investors. She entered the crypto space in early 2018, got burned, but discovered a passion for trading, and now it’s her hobby. Simona covers crypto and blockchain-related topics and takes a deeper look at what lies behind the latest industry trends.