Increased interest rates & their effect on the cryptocurrency industry

The crypto market has fallen recently due to higher interest rates, which reduces demand for high-risk/high-return assets like cryptocurrency. Due to the pessimistic macroeconomic outlook and the crypto market’s increased correlation to equities, crypto may have a dismal year according to Coinwire.

Cryptomarket Dynamics

Since January, Bitcoin’s price has plummeted, shaking investors’ faith and raising concerns about future returns. However, this asset class has seen similar boom and downturn markets in the past. Consider this. If historical performance is any indicator, the current bear market looks to be no different and offers an opportunity to learn more about this business.

Not only the bitcoin market is collapsing. Equity markets have plummeted as investors worry that international central banks may accept recession to manage inflation. Equities, cryptocurrency, and commodities have been volatile since 2022 as investors expect higher interest rates and energy prices. Considering that central banks in all industrialized countries have been increasing rates at historic pace and further rises are imminent, what will the rest of the year bring?

Higher Interest Rates and Crypto Market?

Increased short-term interest rates make it harder and more costly for people and businesses to borrow money, reducing the quantity of money in circulation. Cryptocurrency and the stock prices are more correlated than ever. The token is essentially identical to the S&P 500, falling and rising concurrently.

“Although Crypto values have gotten more matched with stock market movements, crypto markets remain essentially speculative, with many retail traders waiting for the next big bubble,” says Paddy Osborn, Managing Director/Academic Dean at the London Academy of Trading. Since most of this retail optimism is transacted on margin, higher bond yields tend to disincentivize this speculation and lower crypto values.

Higher interest rates hurt crypto markets two ways:

• Market downturn investment: Interest rates boost savings account returns. Investors keep more cash (a liquid, low-risk asset) and less cryptocurrency and other risky assets. This reduces crypto market investment and increases withdrawals, lowering prices.
• Cryptocurrency project values fall: A cryptocurrency project’s value and market willingness to pay decline when interest rates rise.

Bitcoin: Inflation Hedge?

BTC’s most ardent supporters have long claimed that the world’s biggest cryptocurrency was an inflation hedge owing to its limited number of 21 million coins, a safe haven for investors wishing to keep money while mainstream currencies, including the U.S. dollar, deteriorate. Despite 40-year-high inflation rates, Bitcoin’s value has dropped below $20,000. Is Bitcoin no longer digital gold?

Bitcoin has a poor connection with equities and bonds. Crypto’s speculative attractiveness as a multi-trillion-dollar investment market may explain this. Since millions of people and several of Wall Street’s top institutions now trade cryptocurrencies, it’s no wonder that macroeconomic issues that impact other huge asset classes are beginning to hurt cryptocurrency markets.

The bitcoin market is maturing and becoming more efficient, making it more vulnerable to macroeconomic changes. This merely means it is any longer a game performed by a small number of crypto-natives.

Risk Perceptions Drive Crypto Investments

Hedge funds’ risk-reward calculations change when interest rates rise. A bond, a “safe” investment, may draw funds from high-risk, high-return assets. Cryptocurrencies and tokens are risky investments.

Risk-on investing occurs when consumers are willing to invest in high-yielding assets like Bitcoin. Bitcoin, a new asset class, has attracted investors during the 2020-21 bull run. Bitcoin grew significantly as a result.

When risk-averse, or “risk off,” investors want safer, more predictable profits. Corporate earnings downgrades, economic slowdowns, and other factors might cause risk-aversion.

In late 2021/early 2022, risk-off assets like currencies and bond funds have gained favor due to a large de-risking event. Despite market volatility, US government bond rates are rising. Investors who are uneasy with risk choose safe havens in situations like these.

Summation

The recent stock market and crypto market falls have been difficult for some investors, but they may provide new investors a chance to join the market at a level where they may make big returns if and when Bitcoin and other crypto assets recover.

To succeed in bitcoin markets, you must understand their dangers and establish a solid trading plan. The London Academy of Trading’s cryptocurrency education combines academic and practical lessons with 10h/day tutor assistance.