How Does the Fed Rate Affect the Price of Bitcoin?

The key monetary policy tool in the United States is the base interest rate set by the Federal Reserve. A change in the base rate has a substantial impact on the status of the financial system as well as the stock market. Additionally, this shift is reflected in the value of numerous asset classes, including bitcoin and other cryptocurrencies.

How are the Risk Level and the Fed’s Base Rate Related?

Every single financial asset carries with it some degree of potential loss. When seen from the perspective of macroeconomics, assets can be broken down into two primary categories:

• Risky assets are financial instruments that have a variable yield, the level of which is contingent upon the actions of investors as well as the dynamics and conditions of the market. Shares in public corporations are examples of investments that carry a high level of risk. Bitcoin does not yet have a definitive status; nonetheless, under certain market conditions, it behaves as a volatile and high-risk asset, and its price movements match with the dynamics of the stock market. This is despite the fact that Bitcoin does not yet have a definitive status.
• Protective assets, also known as assets with a low level of risk, typically generate a low return but maintain their value over time. During times of economic instability, they can be used as a means to preserve wealth.

These assets consist of a variety of fiat currencies, precious metals (most notably gold), high-rated government and corporate bonds, and certain precious metals. Additionally, a hike in the rate results in an increase in the yield on US government bonds, which are the most important asset class in the world when it comes to mitigating the effects of a crisis.

Why Does the Fed Rate Affect Bitcoin?

The Federal Reserve Board maintains a low base interest rate during times of economic expansion; doing so encourages investment and brings down the overall savings rate. Investors are increasingly drawn to high-risk assets because they provide the opportunity for a greater return on investment.

The Federal Reserve will boost the base interest rate whenever there is an economic downturn or emergency. This motivates economic agents to raise their savings, sell high-risk assets, and go to a “safe haven,” which is to say, invest in conservative instruments, the profitability of which is expanding. Additionally, this stimulates economic agents to sell high-risk assets.

When the Federal Reserve raises the base rate, banks raise the interest rates they charge on loans to individuals and legal companies, and the cost of investments goes up as a result. This results in a decrease in demand for goods, services, and other elements that make up any economy, which in turn slows down the economy overall.

Because of the dollar’s preeminent position in the international economy, an excessive amount of monetary policy tightening or an untimely end of the process of increasing interest rates might trigger a recession not just in the United States but also in other nations.

When market conditions are as challenging as they currently are, investors have a tendency to choose assets with predictable returns, such as government bonds, over hazardous and uncertain assets, such as Bitcoin.

The interest rate set by the Fed is a factor that affects the price of bitcoin, but it is not the only factor. It is not appropriate to base choices solely on this criterion.

Will Bitcoin Continue to Be Considered a High-risk Asset?

It is not possible to provide a definitive response to this issue; nonetheless, in the past, analysts have seen a correlation between the values of bitcoin and gold, which is traditionally considered a defensive asset.

Dan Morehead, the founder of the American crypto fund Pantera Capital, claims that the Federal Reserve is engaging in excessive market manipulation by purchasing an increasing quantity of distressed assets. This behavior, which has already caused issues in the United States labor markets, government bond markets, and mortgage lending markets, according to Morehead. The issues plaguing the economy of the United States will invariably spread to other nations.

According to Morehead, the only issue with bitcoin is that it has a higher correlation with high-risk assets, specifically with the S&P 500 index when it is experiencing a decline. This is the one issue that he sees with bitcoin. The financier is confident that this state of affairs will not persist for an extended period of time.

Morehead is confident that the futures of traditional assets and cryptocurrencies will eventually start to go in opposite directions sooner or later.