The two largest crypto assets by market capitalization, bitcoin and ether, fell by 3% and 4% respectively in June 15 morning trading (GMT +1), pushing the crypto market further into the winter zone. The risk of rising interest rates is one of the most significant factors weighing on the crypto market. Here's what you should know and why it matters.
Fed expected to hike interest rates
- The overall macroeconomic outlook is bleak. The U.S. Federal Reserve is expected to raise interest rates when it meets today. According to reports, the Fed could issue the highest rate hike in 30 years as it seeks to rein in inflation in the U.S.
Why it matters
- The American traditional financial market had experienced the most extended boom in recent memory on the back of low-interest rates, which the Fed used to stimulate the economy.
- Generally, when interest rates are low, businesses can access cheap capital to grow their business.
- However, low rates discourage investors from safe assets such as Treasuries since lower rates mean tinier returns.
- This pushed investment capital toward riskier assets like stocks and crypto in search of higher returns. The increased demands for stocks and crypto sent their prices higher.
- Low rates, sustained over a long period, can harm the market.
- Consumers and businesses tend to have higher discretionary spending power in low-rate regimes. This can throw the supply and demand scale out of balance, so demand for goods and services outweighs supply. This leads to inflation.
- This is the current situation in the U.S., and the country's central bank is now expected to increase interest rates to bring an end to cheap financing.
- Higher interest rates generally encourage investors to allocate more capital to safer assets for a few reasons.
- First, higher rates could make it more difficult for businesses to attract financing to grow their businesses, which poses some level of risk to investors of those businesses.
- Second, higher interest rates encourage investors to allocate more capital toward safer assets to spread risk.
- The crypto market is, in large parts, susceptible to the second risk, as investors are now going after potentially healthier and safer returns in the traditional markets.
- Crypto assets such as bitcoin and ether are suffering a similar fate to growth stocks such as Netflix (Nasdaq: NFLX) and Tesla (NASDAQ: TSLA), all of which have benefited from high returns chasing investor capital.