One of the important economic indicators that cryptocurrency investors pay close attention to is the interest rate decisions of the US Federal Reserve (Fed). So, how do Fed interest rate decisions affect cryptocurrencies? The answer to this question can guide your investment decisions in the crypto world.
What Happens If the Fed Increases Interest Rates?
When the Fed raises interest rates, it increases borrowing costs in the market. This can reduce investors’ interest in risky assets. Since cryptocurrencies are generally considered riskier investments, demand for these assets may decrease during interest rate hikes. The main reasons for this are:
Higher Borrowing Costs: Investors may exit highly volatile assets such as cryptocurrencies because it costs them more to borrow.
Strengthening Dollar: Rate hikes usually strengthen the US dollar. A stronger dollar can attract investors to safe havens and reduce demand for cryptocurrencies.
What Happens If the Fed Cuts Interest Rates?
Interest rate cuts, on the contrary, provide more liquidity to the market and may increase interest in risky assets. In this case, demand for cryptocurrencies may increase. Because:
Borrowing Costs Fall: Investors tend to borrow at lower costs and turn to riskier investments. Cryptocurrencies may become attractive during this period.
Weakening Dollar: Interest rate cuts could weaken the value of the dollar, which could prompt investors to look for alternative assets and turn to cryptocurrencies.
How Are Altcoins Affected?
While major cryptocurrencies like Bitcoin usually react quickly to the Fed’s decisions, altcoins (non-Bitcoin cryptocurrencies) may feel this effect more intensely because they generally have higher volatility. The Fed’s interest rate decisions can have an impact on altcoin markets in the following ways:
Altcoins Fall During Interest Rate Hikes: Altcoins are generally seen as riskier investments compared to Bitcoin, so they can often experience steeper declines during interest rate hikes. As investors turn to safer assets, altcoins can lose liquidity.
Demand for Altcoins Increases During Interest Rate Cuts: When market liquidity increases during interest rate cuts, investors may tend to take risks. In this case, interest in altcoins that offer high return potential may increase and altcoin prices may increase.
Strategic Steps for Investors
Following the Fed’s interest rate decisions can provide a strategic advantage in your cryptocurrency investments. Here are some important points to consider during this process:
Follow Market Trends: Changes in interest rates can trigger short-term movements in cryptocurrencies. Major cryptocurrencies, especially Bitcoin, can react quickly to interest rate decisions. Altcoins can experience sharper movements.
Manage Your Risk: It may be wise to take more cautious steps in your crypto portfolio when interest rates are expected to increase. When interest rates are expected to decrease, you may want to consider more aggressive investments.
Use Liquidity: During interest rate cuts, there may be more liquidity flowing into the market. During this period, you can take advantage of the low prices by increasing your purchases of both Bitcoin and altcoins.
Fed interest rate decisions are a critical factor that directly affects cryptocurrency markets. While interest rate hikes generally reduce interest in cryptocurrencies, especially altcoins, interest rate cuts can increase demand by increasing liquidity in the market. While directing your crypto investments, following the Fed's policies closely can give you an advantage.
