Homer Simpson throwing money in the air because of rampant inflation.

What Does the US Fed Rate Hike Mean for Crypto?

Disclaimer This article is for general information purposes only and isn’t intended to be financial product advice. You should always obtain your own independent advice before making any financial decisions. The Chainsaw and its contributors aren’t liable for any decisions based on this content.

In a bid to contain rampant inflation, the US Federal Reserve just increased interest rates by another 0.75%, officially seeing rates rise to their highest levels since 2008. 

Even though this increase was widely anticipated by economists and investors, stock prices fell drastically — the S&P 500 closed down 2.5% overall — when Fed Chair Jerome Powell revealed that continued rate hikes are still on the cards at a news conference later in the day. This crushed any hopes that the Fed would “pivot” by pressing pause on any future rate hikes. 

To that point, Powell warned investors that it would be “very premature” to consider halting future rate hikes as the institution struggles to contain surging inflation numbers. “Data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” said Powell at the conference. 

Surprisingly, the crypto market, which is led by blue-chip cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), remained steadier than stocks following Powell’s additional statements, even posting some small gains.

Bitcoin initially spiked on the news, gaining nearly 2% before declining a little over 1% later on in the day. At the time of writing, Bitcoin is trading US$20,332 marking a 1% increase in the last 24 hours. The second-largest cryptocurrency by market capitalisation Ethereum gained 1.3% and is currently changing hanging hands for roughly $1,600 apiece.

Powered by TradingView

Slightly smaller crypto assets like Binance Coin (BNB), Ripple (XRP) and Solana (SOL) are also holding steady, with all of the tokens posting an average 0.5% gain over the past 24 hours. This shows that there’s a certain level of investor confidence across crypto markets, as smaller market cap tokens are typically the first to show signs of weakness or volatility following major market announcements.

What does the Fed’s rate hike mean for crypto?

Speaking to The Chainsaw, Charlie Karaboga the CEO and co-founder of Block Earner said the increasing number of knowledgeable investors entering the crypto market may have seen it become a more mature asset class in its own right, but ultimately digital assets remain tethered to the world of traditional finance. 

“Within the last two years we’ve seen increased correlation between the stock market and crypto markets,” said Karaboga.

“With recent rate hikes of the US Federal Reserve and a stronger US dollar, we’ve observed a clear downward trend in crypto markets.”

Charlie Karaboga

“Having said that, new developments in crypto markets are now on the radar of a growing number of sophisticated investors. We can observe uncorrelated activities in the market with new regulation-related news, which is both positive and negative for the crypto industry,” he added. 

To Karaboga’s point, cryptocurrency is still very much an emerging asset class and should be approached with a healthy dose of caution. Typically, high interest rate environments spell bad news for what investors call “risk-on” assets like cryptocurrencies and growth stocks, because people prefer to hold onto their cash. This creates a cycle of falling asset prices, which further leads to people clutching cash ever more tightly.

And it isn’t just inflation that investors are worried about. Russia’s continued invasion of Ukraine and the resulting energy crisis throughout Europe provide more reasons for investors to run for the hills — pulling their money out of stocks and crypto as they do so. 

Overall, with the Fed pressing on with its campaign to contain surging inflation — the highest it’s been since the recession in the early 1980s — it’d be reasonable to expect that the price of cryptocurrencies will continue to slump heading into December.