If you have taken a look at the crypto market recently, you probably already know that things are starting to look bleak. Almost every major cryptocurrency is down in price right now, and a lot of people still don’t know why. Well, it’s all down to interest rates.
The official interest rate set by a country’s central bank can have far-reaching effects on the economy as a whole, including almost all markets. Some markets benefit from rising interest rates, while others suffer.
So why were interest rates raised in the first place? Well, after the Russian invasion of the Ukraine, global oil prices started reaching levels the world hadn’t seen in years. Because of this, the US Federal Reserve was forced to take some kind of action. The main way to reduce the effects of inflation in an economy is to reduce overall consumption and increase savings. This is why the only course of action to take is to raise interest rates.
Interest rates and cryptocurrencies
When interest rates are higher, people are less likely to invest in volatile assets like stocks or cryptocurrencies. Instead, these people are more likely to keep their money in a savings account, since the interest yield would be much higher than before. Due to this, any increase in interest rates will surely lead to a decrease in the prices of cryptocurrencies in general. That is exactly what happened in May 2022.
The Fed raised interest rates in the US by 0.5%. This was the largest increase in interest rates in more than 20 years. It is important to understand that any change in the US economy can also be felt around the world. The US is by far the largest cryptocurrency market in the world, even if it is not the most widespread there. The power of US cryptocurrency holders alone is enough to keep the market afloat.
That is why when the announcement was made and the interest prices were increased, a bloodbath ensued in the cryptocurrency market. Virtually all cryptocurrencies, from Bitcoin to Ethereum, began to fail. Some of the most unlucky cryptocurrencies began to To die. As Terra (MOON). LUNA was one of the top 5 largest tokens in the crypto market by total market capitalization in April 2022 alone. It was priced at over $80 per token.
However, shortly after the announcement was made in May, a LUNA was worth a fraction of penny. Today, the entire Terra (LUNA) platform is dead. Some people have lost millions of dollars on LUNA, and it is unlikely that it will ever be revived.
However, this could be just the beginning. The Fed has previously signaled that it wants to raise interest rates at least three times in 2022, although nothing has been confirmed so far. the best way to predict when interest rates are going to rise is by reviewing current inflation trends.
If inflation rises higher and higher each month, then there is a strong possibility that interest rates will rise. But if inflation is stabilizing or declining, interest rates may not see an opportunity or may be gone down.
But considering the Current Interest rates after the rise, is it possible for cryptocurrency prices to rise again? The short answer is Yes. There is a very real possibility that cryptocurrency prices maybe see a rise again even though interest rates are higher than before. This is because the initial shock factor of higher inflation is going to slowly decline.
In volatile markets like crypto, even a small announcement is enough to send investors into a frenzy. This is precisely why so many investors sold everybody of your crypto assets in a matter of days. But once the market gets I used to do it these interest rates, the prices of cryptocurrencies will stabilize and start to rise.
But how high will they go? No one really knows yet. Cryptocurrencies are unlikely to hit new highs anytime soon. At least not at current interest rates. But that doesn’t mean that no one can do money of crypto. There are still many ways that people they can make money with crypto no matter how bad the situation is.
Because believe it or not, major cryptos like Bitcoin and Ethereum still see massive fluctuations in price almost every day. These fluctuations could potentially be beneficial to traders.
Just as the cryptocurrency market was negatively affected by the interest rate hike, so was the stock market. In May 2022, we even saw actions like Tesla have a losing streak and poor performance. This is usually because Tesla is a stock that people invest in primarily because of its potentialnot for its current performance.
This makes Tesla shares much more like cryptocurrencies than other companies, and also makes them much more volatile. Because of this, investors are now less likely to invest in Tesla stock in general.
How a decrease in interest rates affects cryptocurrencies
But now that I’ve talked about what happens when there’s a increase in interest rates. Let’s talk now about what happens every time there is a diminish in interest rates. I will stick to US interest rates as I already mentioned that that is all that matters in the crypto world. Now the US economy is kind of designed so interest rates are did you mean stay low unless there is an emergency (such as unprecedented inflation). The United States is no longer a manufacturing powerhouse.
The bulk of its economy comes from consumption and the services sector. This is why there is a very good chance that the feds want to lower inflation rates again like as fast as possible. No one can accurately predict the timeline of when that will happen, but it will happen eventually.
When does it However, we are likely to see one of the biggest crypto rallies in market history. Suddenly, people will be much more confident whenever they invest in volatile assets like cryptocurrencies. they will have more opportunities to invest. But simply, the change in perception going to have a massive Effect on cryptocurrency prices.
When savvy investors to know this change in perception is happening, they will start pouring more money into crypto than ever before an increase in price across the board. In all likelihood, this will likely lead to some of the highest crypto prices we have ever seen, and the “boom” period will last for a while.
But of course just like the shock factor Will it will eventually disappear in cryptocurrency prices when interest rates are raised; the same will happen as long as interest rates are diminished. A small drop in interest rates does not mean that cryptocurrency prices will continue to rise forever.
Eventually, there will come a time when investors will want a return on their investment, and every time the prices rise a little, almost everyone will start selling. This sales spree will cause, once again, a decrease in prices.
What also matters is how many the interest rate increases or decreases. The interest rate increase of 0.5% was completely unprecedented for the 21st century, at least. These kinds of numbers are not uncommon around the world, but in the US they spell trouble. That’s why this accident was worse than anything we’ve seen in the past.
However, when it comes to decreasing interest rates again, it is likely to be much more gradual. If he diminish is slower than the rise, it would mean that we may not see that “boom” that many of us are hoping for. Instead, we will similarly see a gradual rising cryptocurrency prices across the board. When combined with the fact that people will want to sell crypto after every spike, it may not even affect prices that much in the long run.
But all that is speculation. In reality, no one really knows what the Fed is considering when interest rates go up or down. The reasons are probably much more complicated than we all think, and all the theories that people have proposed about the effects of these crypto interest rates could end up being fake.
Instead, cryptocurrency developers could come up with a way to mitigate the impact of interest surges on cryptocurrency prices. The crypto market is forever Evolving We are a long way from when Bitcoin was launched in 2009. There are now countless other cryptocurrencies, all of which have their own unique characteristics and guidelines.
But at the end of the day, do interest rates affect cryptocurrency prices right now? Absolutely. Proof is literally everywhere right now. However, there may come a time when interest rates are not the most important thing in the world when it comes to cryptocurrency prices.
For that, crypto will have to be more separate of the world economy in general. That is the goal of decentralizing cryptocurrencies, so it will be interesting to see what happens next.
When do you think interest rates will go down again? Let me know below in the comments!
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