The Federal Reserve raised its interest rates by three-quarters of a percentage point rate on June 15. This is the first time this has happened since the board did so in 1994. The highly anticipated move came amid a market that had already entered bear territory and inflation at a 41-year high.
The Fed’s hike is also impacting the crypto market, which was already suffering a lot in the crypto winter mode, with prices slashed across the board, triggering massive layoffs at several companies.
Let’s see how this has impacted the crypto market in detail!
How Did Crypto React?
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Cryptocurrency has often been touted as a cure-all for what ails you, whether that’s inflation, low interest rates, lack of purchasing power, devaluation of the dollar, and so on. Those positives were easy to believe in as long as crypto was rising, seemingly regardless of other assets.
Contradictory to what the analysts expected, the Federal Reserve hike of interest rates by 0.75 percentage points did not generate a double-digit shock in the crypto markets. Instead, cryptocurrencies showed a surge following the announcements.
Bitcoin surged quickly after the Fed announcement, reaching above $21,000 levels, and recovering from an 18-month low. Altcoins like Solana and Cardano witnessed a double-digit recovery, following a turbulent week.
Ripple and BNB rose 9.8 percent and 7.04 percent respectively, whereas tokens like Dogecoin, Polkadot, and Avalanche all showed a double-digit short-lived uptrend. They rallied 13.73 percent, 11.26 percent, and 14.59 percent respectively.
The global market cap also rallied around 4 percent and settled at $950 billion, as per data from CoinMarketCap.
Bitcoin has been tightly correlated to stocks throughout the year (though slightly less so in recent months), especially when responding to Federal Reserve policy. A sizeable portion of the market began to fear a 100-basis point hike was imminent following the Canadian central bank’s equivalent hike earlier this month.
However, the surge in cryptocurrency prices was only short-lived.
Analysts expect this relatively high-rate environment to be transitory and that crypto will bottom out in the coming months as the economy slows significantly. Considering the current scenario, most assets are heavily correlated in this risk-off environment, meaning that they are selling off in unison because of the tightened liquidity resulting from inflation and interest rates. There’s just not as much money for investors to dedicate to assets they’re having to spend more on food and fuel due to the inflation.
What Does The Future Hold?
Indeed, cryptocurrencies have responded to reduced liquidity as did other risky assets, by falling when the Fed announced in November that it would begin tapering its purchases of bonds and signaled higher interest rates were soon on the way.
Experts still anticipate an up year. Indeed soon, when the back of inflation is broken, interest rates will no longer be as pronounced a problem facing investors. This is inevitable, and when this happens digital assets will continue on their meteoric trajectory. It’s all about time horizons, and the horizons are promising if you look out far enough.
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