After the Fed raised interest rates by 0.75%, Bitcoin, Ethereum, and other cryptocurrencies maintained intraday gains. Analysts for Bitcoin anticipate additional declines for BTC as a result of the Federal Reserve's decision to increase interest rates by 0.75% basis points and set its target interest rate for 2022 at 4.4%. So, is it all? How do interest rates affect cryptocurrency?
Yes, generally speaking, lesser appetite for high-risk/high-return assets like cryptocurrencies is associated with higher interest rates. Theoretically, this should imply that the cryptocurrency market will see price drops at various periods this year, while rises are expected to be minor (e.g., 0.25% per pop) so may not significantly reduce investor appetite for risk after each increase's initial shock.
However, given the stock market's negative response to recent inflationary risks and the cryptocurrency market's growing correlation to the stock market, 2018 may be a dismal year for cryptocurrencies due to the shifting macroeconomic picture.
How big of an effect will price increases have? The increase in March (and following increases) may have a substantial impact on bitcoin and the larger cryptocurrency market, especially in light of the recent market collapse.
For instance, BTC dropped from approximately $38,000 to $35,600 after the Federal Reserve convened on January 26. This drop was around 6%, and it happened in about 24 hours.
The Fed has really had a negative impact on bitcoin and other cryptocurrencies for a longer period of time: on January 5, the FOMC released its minutes from December 14–15, in which it stated that it was likely to raise rates in 2022.
Additionally, Bitcoin and other cryptocurrencies have been on a longer-term negative trend since the January 5 release, with the cryptocurrency market losing 21.7% of its overall value. To put it another way, the Fed's growing hawkishness has had a cumulative impact on the cryptocurrency market, lowering investor confidence in expectation of a tightening monetary policy.
The Fed's gloomy outlook has been cited by many analysts as the primary cause of recent downturns, and Blockchain Coinvestors CEO Lou Kerner told that the Fed continues to have influence over the market.
Simply put, three (or more) successive rate increases may have the overall impact of weighing down bitcoin and cryptocurrencies in general, making 2022 a year of another cryptocurrency bear market. Nobody knows how much prices will actually drop, but given that the crypto market dropped by as much as 89% between December 2017 and December 2018, the worst-case scenario may turn out to be disastrous.
Of course, the market has changed since 2017; therefore, there is a case to be made that it will do a better job of holding onto its highs. To put it another way, inflation may worsen before it improves, forcing the Fed to raise rates more than three times this year. If so, cryptocurrency may experience a significant impact.
