With Bitcon’s reputation as ‘digital gold’ often highlighted among investors, the recent economic impacts of rising inflation rates leading to the Fed increasing its base rate for interest has paved the way for a significant challenge that the entirety of the cryptocurrency landscape must respond to. 

Crypto’s strongest cheerleaders would argue that assets can overcome factors like inflation, interest rates, a lack of purchasing power, the devaluation of fiat currency and many more inhibiting actions in finance. These assertions could be easy to believe when the likes of Bitcoin were on a bull run, but today the market seems far less immune to external factors. 

“Higher rates generally lower appetite for riskier investments and that is likely one of the causes for a significant pullback in digital asset prices over the last year,” says Brian Spinelli, co-chief investment officer at Halbert Hargrove.

One look at CoinMarketCap’s total cryptocurrency market capitalization chart clearly shows that the cryptocurrency market responded in a similar way to the reduced liquidity of investors as many traditional stocks. 

When the Fed announced that it would be raising rates in November 2021, cryptocurrencies like Bitcoin had reached an all-time high value, and the total market capitalization of assets stood at more than $2.9 trillion. However, by June 2022, the cryptocurrency market had tumbled below the $1 trillion mark. 

It’s clear that rising base rates have coincided with a loss of investor appetite to position their money in cryptocurrency throughout 2022. Although there are definitive signs of a recovery underway in 2023, we’re yet to see a return of the enthralling bull runs of 2021 throughout the landscape. 

How much do rising base rates impact the cryptocurrency market? And will investors need to wait for calmer waters in traditional markets before buying back into crypto? Let’s take a look at what interest really means for cryptocurrency:

How Do Base Rate Rises Impact Crypto?

Higher interest rates mean that there’s a general shrinkage of money supply, and a shrinking of the Fed’s balance sheet. Furthermore, rate hikes mean that the costs associated with borrowing money rise for individuals and businesses alike. 

This shrinkage of money supply coupled with price increases for businesses and individuals can lead to a lowering of public company valuations and a subsequent decline in their stock prices. These discounted prices then can’t be picked up by investors because there’s less disposable income to move into stocks and shares. 

Ultimately, these factors can lead to a widespread stock market slowdown which spreads to cryptocurrency because there’s even less money for investors to place in riskier assets. Here, the volatile nature of crypto can be associated with higher risk, driving retail investors away from the market and towards higher returns on government bonds and other safe haven assets. 

Finding Correlations Between Fed Rate Hikes and the Crypto Landscape

So what kind of an impact do Fed rate hikes actually have on cryptocurrencies? The evidence shows that announcements surrounding interest rates can carry significant market ramifications. 

To explore this deeper, we can see that when the Federal Reserve met on January 26th 2022, the price of Bitcoin dropped from $38,000 to $35,600, representing a 6% drop in the space of 24 hours. 

Significant declines in the value of cryptocurrencies are nothing new, and these jitters can often rebound or deepen in the days that follow, depending on many factors.

There are many other instances where the price of Bitcoin appears to have been impacted negatively by the whims of the Federal Reserve. Following the publication of the FOMC’s December 14th-15th minutes in 2021, BTC began a drop from $46,500 to an eventual $41,500 in a matter of days–representing a decline of around 10%. 

As Bitcoin’s overall performance since 2020 shows, instances of the Fed’s base rate increases from November 2021 have correlated with a sustained decline in the value of the asset. Today, BTC is more than 61% adrift from its November 10th 2021 all-time high.

“Tightening by central banks is the biggest macro issue driving both the stock and crypto markets today, which is why we’re seeing a very high correlation between the markets,” said Lou Kerner, CEO of Blockchain Coinvestors. 

Building a Sustainable Relationship with the Fed

There is, however, mounting evidence that the Fed’s rising rates are having a less pronounced impact on cryptocurrencies in recent months. 

Although both the stock market and cryptocurrency market alike will always be fearful of future rate increases, it may be that growing familiarity with higher living costs and lower market performance are emboldening investors to return to the portfolios they abandoned in 2022. 

“I think markets are far less anxious about interest rate hikes now than in Q3 and Q4 2022,” said Dan Raju, CEO of brokerage firm Tradier. “With the better-than-expected recent inflation numbers, the Fed and investors feel like they have some control on inflation. It seems now everyone sees a path to an eventual holding off of rate hikes.”

Although inflation remains high and there’s no end in sight of relatively high interest rates, both stocks and crypto alike appear to have bottomed out in Q4 2022, with 2023 prices showing the early signs of a revival. 

The extent of this revival may be relatively short-lived, but it provides a basis for optimism that the shock and awe of base rate hikes can wear off over time, even though the rates themselves remain higher. 

Looking to the longer-term future of crypto, we’re likely to see more institutional interest pave the way for more organic stability within the cryptocurrency ecosystem than we’re currently seeing within a retail base. This may help to build a more positive and trustworthy relationship between the Fed and crypto landscape. 

With the continued rise of institutional investors in the crypto markets, the demand for more sophisticated trading infrastructure is also likely to grow. The path to optimal execution across a fragmented market place that continues to face regulatory uncertainty–particularly in the US market–will be paramount. Trading terminals like SKARB could be at the forefront of providing the solution.

SKARB enables change for institutions in crypto, and provides unprecedented levels of counterparty risk management. This is because the SKARB trading terminal operates as an all-in-one toolset that allows institutions to utilize a vast array of exchanges and market makers all within its UX. 

This effectively offers a solution for institutions to quickly counter issues of liquidity and far greater assistance against high-profile exchange collapses like that of FTX in recent months. Furthermore, SKARB’s unified platform can help institutions to effectively audit themselves as they go. 

Monitoring Greed

To better get to grips with market sentiment towards cryptocurrency, there are many tools that can help to provide insights into matters of investor intent. Oftentimes, greed can be a positive thing among retail investors, and in a sentiment-driven market like crypto, FOMO weighs heavily in the actions of investors. 

For this reason, the Fear and Greed Indicator can be a great means for gaining a general sense of whether market sentiment towards cryptocurrencies are high or low. With scores between 0-100 indicating the extent of greed, we can see when more investors are intending to purchase more crypto. 

The Fear and Greed Indicator can signify when investors are too worried about headwinds to build on their investments, while a high reading can show when greed is taking over the market. 

Today, with the indicator showing a score of 59, we can see that markets are leaning towards ‘greed’, showing that there’s an appetite for investment despite the impact of interest rates. 

It’s through these insights that investors can look beyond the jitters of base rate hikes and instead observe a bigger picture that spans the crypto ecosystem. Crypto has the ability to operate as a truly decentralized ecosystem, and with the right tools, investors have the power to look beyond the economic noise and at more actionable insights that can more accurately identify opportunities. 

This empowers investors of all scales to see beyond the Fed’s curtain, and to discover more buying and selling opportunities that can be realized without the fear of short term economic headwinds.