What is Fed interest rate? How do Fed interest rates affect cryptocurrency prices?
Many traders who are new to the world of crypto often confused about the connection between FED interest rate and its impact on Cryptocurrency prices. Well Let's make it simple
The United Stated Federal Reserve often known as FED acts as the central bank of the United States. One of the main responsiblity of U.S central bank is to manage the interest rate of the country.
Lower Interest rate can stimulate the economic growth, make borrowing cheaper and attract the people and companies to invest and spend more. Cryptocurrency prices often hike if FED cut the interest rate.
Increase in Interest rate often rise the inflation within the country and people are less likely to borrow or invest. Crypto prices like bitcoin also loose its value.
Impact of FED interest Rates on Crypto Market
In most cases, Crypto market reacts in this way,
High interest rate = Crypto prices low
Low interest rate = Crypto prices bullish
People often don't take any risk to trade in cryptocurrency market when fed interest rates rise due to its high volatile nature. People attract to invest in low risk assets like bonds. Demand of cryptocurrency decreases, pushing prices down.
Margin trading or Leverage trading is gaining popularity these days, Traders borrow money to sky rocket their profits. Hence leverage trading is the most riskier. When the rates get high the traders have to borrow money at higher cost. As a result of this people have to sell their positions to meet the obligations which led the crypto prices downwards.
On the contrary when fed interest rate decrease, people are willing to invest more, banks offers loans at cheap prices, money inflow to crypto, tends the prices high.
Well, connection between FED interest rates and financial markets are very complex. In short term we may observe the huge fluactions but in long term investors are more optimistic for crypto investment. This is not 100% guaranteed that rise in interest rate can cause the crypto prices down or vise versa.
