How Interest Rates Impact The Crypto HODLers
Undoubtedly, cryptocurrencies have become a key player in the global financial system, being adopted by the leading players in worldwide commerce. Now, major corporations, private investors, governments and financial institutions plan their crypto strategies according to the latest interest rate changes quoted by the US government’s central financial authority – the Federal Reserve (FED).
This organisation is responsible for setting all economic policies and legislations affecting the US market and international business landscape. Thus, it is essential to understand how the FED sets the interest rate modifications, as they could cause major strategic shifts in the crypto field.
Understanding The Interest Rates
The interest rate mechanism employed by the FED is one of the most influential tactics in the global financial landscape. Interest rates can influence business growth, employment rates, international expansions, and short and long-term investment strategies for small, medium and large-scale businesses. Thus, FED has a tool to influence an entire economy in a fairly short period. When interest rates are lower, the economy thrives and grows. Businesses become more aggressive with their strategies, expanding more rapidly and increasing their scope of operations.
The FED looks at numerous variables when determining the official interest rates, trying to set the best numbers to keep the economy from recession and inflation at the same time. In simple terms, FED’s mission is to preserve the golden middle, avoiding economic downturns but not supporting currency inflations.
How Does FED Decide To Increase Interest Rates?
Balancing the interest rate numbers is a delicate process, which is decidedly not precise, as it is almost impossible to predict the economic movements of the free market. Generally, the FED tries to steer the sheep toward sustainable growth. When interest rates are low, individuals and businesses become more aggressive with borrowing. After all, it makes sense to take on debt if the cost of debt is much more manageable.
The increase in borrowings results in increased demand for almost every product or service on the market. People buy more cars, houses and even luxury items. Businesses increase their staffing, open up new manufacturing plants and so on. Thus, both demand and supply metrics increase dramatically. However, the USA and the world have experienced numerous instances where the demand exceeds supply; and the irrational buying choices of consumers create a bubble that could burst at any moment.
Several recessions happened due to severely decreased interest rates; as the supply could not keep up with the aggregate demand; leading to severe inflation rates and devaluing the entire economy. Thus, the FED strives to play the balancing game, decreasing; and increasing the interest rates as necessary to ensure growth but prevent overstimulation of the economy.
Can Increased Interest Rates Positively Impact Crypto Traders?
Empirically, the increase in interest rates has always been bad news for the crypto sector. There is a firm correlation between interest rate movements and the trading volumes of the flagship Bitcoin cryptocurrency. Every time the FED decides to increase interest rates, the crypto market becomes more conservative; as they have to preserve funds for other investment activities.
However, the recent events have showcased a completely new strategy formulating on the market. It is widely known that increased interest rates signal that conventional currencies might be inflated due to an overstimulated demand on the market. While monetary and fiscal policies can control inflation, nobody knows how steep the value decline will be. Thus, many investors and traders have decided to invest in crypto, selling their fiat currency high; and holding the crypto funds until the inflation cycle ends.
With this approach, traders can avoid losing the inflated value of their fiat currency investments by simply redirecting their reserves to cryptocurrencies. While this strategy seems dominant, the general public is still mixed, as cryptocurrencies present many inherent risks; including liquidity and volatility concerns.
The Possible Future of Markets That Include High-Interest Rates
While recent years have not been kind to the crypto markets, the following year of 2024 promises to be good. In the 2020-2021 period, the FED declared near-zero interest rates to help the market recover from the COVID-19 pandemic and its crippling effects on the economy. In the 2022-2023 period, FED has been dealing with the consequences of the unexpected surge in the remote workforce; and other areas, which led to significant inflation.
The inflationary trends are almost over; and the FED is promising a future interest rate decrease to facilitate growth once again. Thus, even if the public doesn’t adopt crypto as a viable alternative to high-interest fiat investments; 2024 is set to assist cryptocurrencies in reclaiming their former popularity.
Final Thoughts
To summarise, high-interest rates quoted by the FED are almost always negative for the crypto landscape. However, in some cases, the general public has decided to convert their fiat funds into crypto to offset the inflationary losses. In general, cryptocurrencies will benefit from the lower interest rates; as investors will be more willing to invest in riskier assets.
