The Federal Open Market Committee has raised interest rates by 75 basis points, raising the primary credit rate to 1.75%. Crypto markets were largely flat after the news, as media reports had hinted at the rate hike.
According to the US Federal Reserve’s June 15 Summary of Economic Projections statement, the fed funds rate is expected to exceed 3% by the end of the year and approach 4% by the end of the year. of 2023, above previous estimates. to return to below 3.5% in 2024.
Bitcoin, the world’s largest cryptocurrency by market capitalization, is currently trading at around $20,500, following the news after falling to nearly $20,000 earlier in the day. Amid the chaos related to Celsius and 3 Arrow Capital, the crypto markets are currently extremely volatile.
bitcoin and inflation
Bitcoin’s short-term ability to act as a hedge against inflation was invalidated earlier this year, as previous rate hikes (25 basis points in March and 50 basis points in May) to counter rising inflation did not They have done nothing to boost their price. Earlier this month it was reported that inflation in the US has peaked at 8.6%, the highest level in nearly 40 years.
CNBC reported that the rate increase was expected to be the largest in 28 years at 75 basis points. The news outlet stated that “[Powell] and other officials had been pushing the narrative that back-to-back 50 basis point rate hikes would be the most likely course.”
Powell has previously downplayed the need for a 75 basis point rate increase, stating that raising rates that much at once “is not something the committee is actively considering.”
The Effect on Crypto
Rising rates affect the cost of borrowing, which has a direct impact on many cryptocurrency investors. While the increase may not have an effect on the cost of DeFi borrowing, those using traditional finance for crypto purchases could be in trouble if the cost of borrowing becomes unsustainable.
The use of leverage in trading is common in cryptocurrencies, even among major players. It is rumored that Celsius has been in trouble due to having an unsecured loan following the recent market sell-off.
The immediate consequence on the price of Bitcoin and other crypto assets may well be reversed in the short or medium term. During previous Fed announcements, Bitcoin initially reacted positively before pulling back in 24 hours.
Regarding inflation and interest rate hikes, Bitmex recently published a post saying that
“Trying to be tactical and time markets is considered foolish. This is now the prevailing narrative, with passive funds and automated algorithmic strategies leaving active fund managers and stock pickers behind. It’s time to shut down the machines and sell the index trackers, you won’t have a choice. Buy Bitcoin at $20,000. Play the game!”
Bitmex also stated that it expected that the recovery from inflation “could take five or ten years to develop”.