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The rise in interest rates, high inflation, and growing energy costs will likely reduce consumers’ purchasing power, as they will have less disposable income. This situation will substantially impact the cryptocurrency market, as consumers may become less inclined to invest in digital currencies. The decrease in demand can lead to a decline in the value of cryptocurrencies and reduce their overall market capitalization.
How interest rate hikes impact cryptocurrencies
The cryptocurrency market faced headwinds in 2022 as interest rates rose and values of cryptocurrencies continued to trend downwards. The next set of numbers will be released on February 1st and a further increase in the interest rate is expected to be announced. The financial markets predict a 25 bps increase in interest rates.
Despite a positive start to the year, Bitcoin and Ether have both breached critical support levels, indicating a challenging market for cryptocurrencies. A potential increase of 50 bps would have a harmful effect on the market.
Cryptocurrencies are often portrayed as a solution to various economic issues, such as inflation, low-interest rates, and depreciation of fiat currencies. While the upward trend in cryptocurrency prices seemed to be impervious to other market factors, this was a factor that strengthened belief in their favorable aspects.
The rise in interest rates tends to lower demand for riskier investments, likely contributing to the decline in the value of digital assets over the past year. Despite this, the Federal Reserve has already indicated a commitment to high-interest rates in 2023, potentially maintaining elevated rates even if no further rate hikes occur after February.
The only scenario that may reverse this trend and lower rates would be a recession in the US, which would be negative news.