How the Federal Reserve rate hike will affect the crypto market

Against the backdrop of a record 40-year inflation rate in the U.S., the leadership of the Federal Reserve (Fed) held an emergency meeting on the issue of raising the discount rate. Contrary to the nervous reaction of the markets, the regulator did not shock the public, but even so, the crypto sector may benefit from it.

A net positive for cryptocurrency

When it comes to Fed policy, expectations are often worse than reality. This led to a nervous reaction in U.S. stock indices, with the S&P 500 falling 1.9 percent and the Nasdaq 100 falling 3 percent on Feb. 11.

In an interview with CNBC, Tom Lee, founder of analyst firm Fundstrat Global Advisors, said that a rise in interest rates would cause U.S. households to lose $60 trillion, so he believes that this money will eventually “settle” in cryptocurrency.

“Obviously they will go into stocks like FAANG (Facebook, Apple, Amazon, Netflix and Google stock). But I think most of the speculative capital originally intended for stocks could go into cryptocurrencies,” the expert said.

Brock Pierce, founder of the Bitcoin Foundation, also believes that the U.S. central bank’s increase in the benchmark interest rate plays into the crypto sector’s hands.

“A rate hike creates volatility in financial market and has a positive effect on cryptocurrency. A large portion of the market uses it for hedging and as an alternative asset class in times of financial instability. So it can be a net positive for crypto,” Pierce added on Fox Business.

This is being realized by rebalancing the portfolio and injecting not only into the most established asset, bitcoin, but also into stabelcoins.

Experts cite IntoTheBlock figures, according to which over the past 30 days, the concentration of Tether (USDT) in the hands of whales has increased by 12.5%. Based on which we can conclude that institutional investors see this asset as a means to limit risks.

At the same time, the inflow of funds in USDT to the accounts of major holders for the last week decreased by 18.63%, while the outflow increased by 0.12%. Along with that, bitcoin inflows into large holders’ accounts (holding more than 0.1% of the circulating supply) increased by 33.4%, while outflows from their accounts fell by 8.24%, which tells us that institutional confidence in BTC is strengthening.

That the cryptocurrency market is optimistic about the lack of hard news from the Fed is also evidenced by the Fear and Greed Index. As of February 16, the index stood at 51, which is consistent with neutral sentiment.

How does the discount rate affect the investment market?

The Federal Reserve is made up of 12 Federal Reserve Banks, each with a specific list of states they serve. The discount rate is the interest rate at which state banks lend money to commercial banks, which affects lending to other companies.

Thus, an increase in this rate has far-reaching consequences. And it’s about the investment market as a whole, as it will lead to:

  • a reduction in speculative asset purchases;
  • an increase in financial pressure on debtor companies (i.e. practically all) through higher debt service costs;
  • decrease in the attractiveness of assets in the eyes of investors due to the slowdown of the U.S. economy as a whole.

This meeting was the second since the beginning of 2022. Earlier in January, the Fed left the discount rate unchanged at 0.25%. They did not raise it on February 14, either.

Despite this, experts are almost unanimous about the inevitability of the increase at once by 0,5% at the next meeting on March 16. They are pushed to this by the growth of inflation in the U.S. in January by 7.5% year-on-year, which was the absolute record since 1982.

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Arsen Islamov
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