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Will interest rate hikes douse cyrptocurrency sector?

By Indrabati Lahiri

23:00, 24 January 2022

Image of coins
Interest rate hikes could threaten risk assets – Credit: Shutterstock

Interest rate hikes have been mulled over by central banks for the last several weeks, as inflation rates in the UK, the Eurozone and the US have hit multi-year highs.

With the inflationary situation threatening to get out of hand, central banks have steadily been backed into a corner by demands for action and regulation.

The Bank of England became the first to finally take action and raise interest rates in December, surprising investors and the global financial community, as it had previously appeared to have a more dovish stance. In December, the US Federal Reserve also hinted at raising rates in the near future, as inflation in the US continues to soar. This has led to a number of global sell-offs, as well as widespread concern about the impact this move could have on various sectors.

The cryptocurrency and digital assets, such as NFT sectors, have traditionally been some of the most volatile, with sudden rallies and frequent crashes. This makes them even more likely to be affected by the slightest changes in financial or economic policies.

Investors seek safe havens

Investors are also concerned about whether interest rate hikes may drive investment away from these sectors, as the sectors are often considered to be riskier. Hence, in a scenario where cash flow is considerably reduced, it would be likely that investors would want to protect their wealth even more than usual. 

The cryptocurrency asset class is a turbocharged beneficiary of easy monetary policies, with only select parts of the market (such as Layer 1 protocols) and “some” DeFi projects driving true value creation, that isn’t just a function of easy monetary policies. That’s why, the US Fed going on a hiking cycle (4-5 hikes minimum) will have a material adverse effect on cryptocurrency market valuations as a whole," said Petro Levhenko, managing partner of Ascension Capital.

“As liquidity is tightened, it will seek to exit the riskiest markets first. We have already seen this happening to a large extent. However, this will lead to some opportunities to purchase “true value” in the ecosystem, which currently consists of L1s such as LUNA, AVAX, SOL, NEAR, ATOM and of course the behemoth ETH.”

BTC/USD

67,660.40 Price
+0.870% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

XRP/USD

0.60 Price
+3.710% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

ETH/USD

3,540.64 Price
+0.860% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

DOGE/USD

0.14 Price
+6.990% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

“Since the Fed signaled rate hikes last month, money is flowing out of the crypto market. However, the market has been pricing in as many as four rate hikes this year, according to the CME's FedWatch, and it will be safe to say that the crypto market will not be surprised when the Fed decides to raise interest rates in March.

"Also, as long as the Fed manages to tame inflation at a comfortable level and will not signal more than four rate hikes this year, bitcoin's January low ($39.6k) will likely be its bottom in the long run." wrote Yuya Hasegawa, cryptocurrency market analyst for Bitbank.

Fear of tighter money

Hasegawa goes on to highlight, “The market’s fear for a fast and tighter monetary policy has driven the US Tech 100 lower to the point where it entered a correction phase (down more than 10% from its top), which in turn accelerated the risk-off sentiment that ramified across markets, including crypto.”

“All eyes will be on the FOMC meeting this Wednesday and the trajectory of the future U.S. monetary policy as to how many and how much rate hikes there are going to be this year. Three to four 0.25bp hikes will likely be no surprise for the market but the possibility of 0.50bp rate hike in March cannot be eliminated at this point as inflation has been running way higher than the Fed would hope to be.

The meeting may be a turning point for bitcoin if there is no hawkish surprise but ‘wait and see’ will be a wise move until the result comes in.”

Read more: US Fed pivot frays markets ahead of Wednesday decision

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