The US Federal Reserve, commonly known as the Fed, is the central bank of the United States and sets the country’s monetary policy. The cryptocurrency market is heavily influenced by the Fed’s decisions, as raising interest rates may discourage investors from investing their capital in riskier assets, such as cryptocurrencies. Lowering interest rates, on the other hand, may encourage investment in these assets, increasing demand and boosting prices.
How do interest rates affect the cryptocurrency market?
Interest rates affect the cryptocurrency market in several major ways:
Borrowing costs: When the Fed raises interest rates, the cost of borrowing increases, making it harder for investors and business owners to obtain financing. This can reduce investments in riskier assets, including cryptocurrencies.
Asset Attractiveness: When interest rates rise, traditional financial instruments such as bonds and bank certificates can become more attractive compared to cryptocurrencies, which are typically considered more volatile assets. This can lead to a redirection of funds from the cryptocurrency market to traditional financial markets.
Inflation: Low prices for some assets can lead to increased inflation, making cryptocurrencies like Bitcoin a valuable haven. In this context, cryptocurrencies can be seen as a means of protecting value.
General Market: Changes in monetary policy affect the market as a whole. If there is a sense of uncertainty or a decline in the market due to an increase in interest rates, the cryptocurrency market may be negatively affected.
In general, interest rates can be viewed as a variable that can influence investors' decisions and attitudes towards cryptocurrencies.