How do the interest rates and future prospects of the Federal Reserve affect the cryptocurrency market?

How does the Federal Reserve's interest rates and future prospects impact the crypto market?

Author: Ben Strack, Blockworks; Translation: Song Xue, LianGuai

Industry observers said that the Federal Reserve’s decision to raise or pause interest rates on Wednesday may not have a significant impact on the cryptocurrency market. However, the Fed’s views on the overall economy may change.

In the more than a year-long battle against inflation, the Fed has continuously raised the federal funds rate. It increased the federal funds rate from 0.5% in March 2022 to 5.5% in July, and resumed raising rates in June after a temporary pause in May.

Ruslan Lienkha, Market Director of Web3 platform YouHodler, said that the Fed may maintain interest rate stability on Wednesday as it tries to “strike a balance between possible recession and high inflation”.

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Lucas Kiely, Chief Investment Officer of digital wealth platform Yield App, stated in a statement that such a decision may mean that the Fed is just taking a “breather” or has reached a point where it no longer considers further rate hikes.

Kiely added: “The latter may mark the end of the economic war after the pandemic, and perhaps also mark the beginning of global market recovery.”

How the statements affect the cryptocurrency market

Some market observers believe that the Fed’s decision to raise interest rates on Wednesday may not have a significant impact on the cryptocurrency market.

Matteo Greco, research analyst at Fineqia International, stated in a research report on September 16 that many investors expect rates not to rise and have already priced it in.

Lienkha said that only a rate cut (which he said is currently unlikely) would have a significant impact on cryptocurrency prices. He expects Bitcoin (trading at around $27,220 on Tuesday afternoon Eastern Time) to remain in the range of $25,000 to $30,000.

However, James Butterfill, Research Director at CoinShares, said that slight differences in the press conference could change the cryptocurrency market.

Federal Reserve Chairman Jerome Powell is scheduled to speak at 2:30 pm Eastern Time on Wednesday after the two-day meeting of the Federal Open Market Committee (FOMC).

“If the Fed expresses more dovish statements, then the price of Bitcoin may rise.” “On the other hand, overly hawkish statements may put pressure on prices.”

Jeff Feng, co-founder of Sei Labs, said that while raising interest rates may mean a less encouraging environment for risk-taking, the cryptocurrency market is influenced by many factors, not just central bank policies.

He pointed out: “Their inherent volatility means that caution should always be exercised, especially in major financial events such as the Federal Open Market Committee (FOMC) meeting.”

He added that major cryptocurrencies such as Bitcoin and Ethereum often correlate with the stock market.

Lienkha said, “We cannot determine how long the US stock market can withstand such high interest rates without a decline.” “If we surrender, we will experience a massive capital outflow from risk assets, which will definitely push Bitcoin down to $20,000 or even lower.”

The trend of the cryptocurrency market is not only due to the actions of the Federal Reserve

Keeley pointed out that the sign of the Federal Reserve ending its interest rate hikes may be one of the two events needed to trigger a surge in cryptocurrency prices. He believes that the second triggering factor is any proposal from the US Securities and Exchange Commission approving the listing of a spot Bitcoin ETF.

Butterfill said that the market seems to be more sensitive to the decisions of the US Securities and Exchange Commission than to interest rates.

Franklin Templeton has become the latest large TradFi company to announce plans to launch a spot Bitcoin ETF, a fund type that the SEC has never allowed to be listed. Other major participants seeking to launch such ETFs include BlackRock, Fidelity, and Invesco.

The US Securities and Exchange Commission stated last month that it needs more time to make a decision on proposals from companies such as BlackRock, Fidelity, and Invesco. However, industry observers say that Grayscale’s victory over the SEC in a Washington DC appeals court last month has increased the chances of such products ultimately being approved.

Keeley said about traditional financial institutions launching spot Bitcoin ETFs, “This will not only solidify the legitimacy of cryptocurrencies, but also bring unprecedented liquidity to the digital asset space.” “As this industry matures and becomes more closely integrated with mainstream finance, it is clear that these developments could completely reshape the cryptocurrency landscape.”

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