Since 2018, the US Federal Reserve has raised interest rates three times from a base level of 2.25 - 2.5%. One of the most significant differences in economic policy between the Obama and Trump administrations has been the two different strategies for dealing with interest rates.
The current policies of the Federal Reserve have led to a fundamentally different environment with regard to cryptocurrencies such as Bitcoin. This article takes a look at the implications of these changes in interest rates on cryptocurrencies.
Effects on Speculation
The higher interest rates have had an effect on speculation, and this has been felt in the cryptocurrency market. With higher interest rates, investors tend to put their money into traditional investments such as stocks and bonds, rather than into risky and volatile investments such as cryptocurrencies. This has led to a decrease in the liquidity of cryptocurrencies, and this in turn has led to volatility in the market.
Despite the decrease in liquidity, there have been some positive implications of the rising interest rates. Higher interest rates tend to lead to increased demand for cryptocurrency, as investors are incentivized to seek out higher yields. This increased demand can help to drive up prices in the cryptocurrency market and create a positive sentiment.
On the other hand, higher interest rates can also be detrimental to the cryptocurrency market. Higher interest rates lead to an increase in the cost of borrowing, which can be problematic for miners and businesses that require capital for operations. This can lead to a decrease in demand for cryptocurrencies, leading to a further drop in prices.
Higher interest rates from the US Federal Reserve since 2018 have had both positive and negative implications for the cryptocurrency market. On one hand, the increase in demand for cryptocurrencies due to higher yields can lead to a price increase. On the other hand, the increased cost of borrowing can lead to lower demand and a further drop in prices.