What Do The Fed’s Rate Hikes Mean For Crypto?

January 28, 2022 9:51 am

The Fed has mentioned previously that it expects to have three rate hikes in 2022 in order to address rising concerns over inflation and the job market.

If the Fed actually decides to do what it says it is going to do, this would change the entire financial outlook for all markets including the stock market and the crypto markets.

Higher interest rates from the Fed will likely taking capital away from these financial markets due to the fact that most institutional investors would likely prefer to put their capital into government bonds and just get stable returns.

However, this is typically not a super positive event for the crypto markets as it will remove funding that would have been used to buy or hold crypto assets which may lead to a bear market for the crypto industry.

Additionally, a lot of the crypto firms depend on financial funding from investors in order to be able to continue developing their crypto project.

With the amount of funding from investors decreased due to rate hikes, it is possible to see slower development in the crypto space.

The actual impact though is actually very hard to predict because the above scenarios are what typically happen in a theoretical sense.

Real life is often a different story.

CoinDesk explains:

The question is how much money will move to more conservative positions, how fast it will move and whether the shift is already “priced in” to markets.

The likely impact is unclear in part because of the nuances of the current moment, in which even significant interest rate hikes would still leave rates historically low.

Fed rates mostly have been near zero since the 2008 financial crisis, only inching up to 2.4% in late 2019 – before being cut again in the face of another crisis. Prior to the 2008 crisis, the Fed rate had not been as low as 2.4% since 1962.

But will investors see the slow march upwards as the end of the post-crisis era of near-free money?

Heading from 0% to 2.5% doesn’t automatically mean the end of the USD silly season, but it will dampen things to some degree.

A lot of crypto companies in recent years have been able to acquire billions in funding from mainstream venture capital which shows strength in the industry.

As a result, it is unclear just how much the crypto market will be affect when the Fed does perform a rate hike.

Crypto investors are hopeful that there will be little to no impact and that the market at worst would just enter a period of consolidation before going up again.

Regardless of what the outcome is, crypto firms are prepared to survive no matter what as many firms are sitting on large cash balances and are not short on capital.

Perhaps the bigger concern that investors have is what effect this will have on the stock market and whether volatile price swings in the stock market will affect the crypto market.

A lot will happen in 2022 as many expect the Fed to start taking action soon as concerns over inflation continue to increase.

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