The Federal Reserve’s announcement of a 0.25% increase in interest rates (and a promise of further hikes down the road) is expected to influence future price trajectories of assets.
How do the rate hikes affect Bitcoin price?
Immediately after the hikes were announced, Bitcoin price jumped by 4% overnight. Ethereum’s ether, the second-biggest cryptocurrency by market capitalization, registered an even steeper 7% increase. Cryptocurrency markets have continued an erratic price trajectory since with alternating periods of increases and decreases. For example, bitcoin price dipped to $40,817.20 on Sunday on fears of rising tensions in Ukraine. As of this writing, Bitcoin was changing hands at $42,676.30, up roughly 4 percent from its price 24 hours ago.
A Divided Opinion
Opinion seems to be divided on the effect of interest rate changes on bitcoin prices.
Daniel Loh, CEO of Matrix Asset Management, told Coindesk that further hikes in interest rates will pressure cryptocurrency prices in a downward direction. Others are arguing for the opposite case. Jodie Gunzberg, managing director of Coindesk Indices, said the pressure of rising interest rate will trigger an exodus from conventional investments, such as the stock market, towards alternate asset classes like Bitcoin. “The more pressure that’s out on stocks, bonds, real estate or any other traditional asset class…the more demand goes up for alternatives like Bitcoin,” she told Fortune. She analyzed bitcoin price data from November 2014 to December 2021 and found that Bitcoin has tended to outperform other assets when rates are on the rise.
But it is important to remember the context and extent of previous rate hikes by the Fed during that period. For example, the Fed funds rate inched up from 0.5% in December 2015 to 1.5% in December 2017. The economy was humming along: inflation rose from 1.3% to 2.1% and the unemployment rate was 3.9%. The S&P 500’s annual returns jumped from 9.54% in 2016 to 19.42% the following year. Those returns mirrored Bitcoin’s brobdingnagian price run up that culminated in a record in Dec. 2017.
Contrast those circumstances with the precarious economic situation today. Inflation is at a record level of 7.9% and the S&P 500 has tanked from its highs last year as companies grappling with myriad problems, from supply chain issues to a war. After setting two price records last year, Bitcoin price is also struggling. The identity crisis that has plagued the cryptocurrency in its short life – Is it a safe haven against real-world volatility? Is it a hedge against inflation? – is being debated once again as its price moves in tandem with mainstream asset classes.
Is Bitcoin Immune to Interest Rate Hikes?
There is also the case that bitcoin price may be immune to rate the effect of local rate hikes in a particular jurisidiction for an asset with global aspirations. Jason Deane, chief bitcoin analyst at Quantum Economics, told Coindesk that other factors may be influencing recent price moves in bitcoin. “The days of being able to link a particular action with a move in bitcoin price are over,” he said.
But that argument does not take into account the importance of the American economy and investments into the cryptocurrency’s development and infrastructure. For example, the US has become a major center for bitcoin mining during the pandemic. An interest rate hike could have a direct effect on miner operations. It could also affect the flow of venture capital and investment into crypto products and services, factors that have contributed to crypto price surges in the past.
All of this underscores the unpredictable and nascent nature of cryptocurrency markets. While mainstream asset classes have historical data to script a strategy, Bitcoin’s volatility has not provided them with any clues. Steven Sosnick, Lead Strategist at Interactive Brokers, called cryptocurrencies an “immature market”. “[Bitcoin’s] childhood and adolescence have been spent during pretty abnormal times. We don’t know how it’s going to react,” he said.