People doubted the cryptocurrencies’ ability to affect centralised economies, while governments and banks avoided dealing with them. However, the scenery has changed now, and a clear correlation has appeared between decentralised and centralised economies.
Crypto prices are majorly affected by demand level, in which interest rates are crucial in increasing or decreasing people’s ability to purchase or trade cryptocurrencies and drive the demand for digital assets.
The Federal Reserve Bank uses interest rates to stabilise the national economy and drive investments. How does this affect cryptocurrencies? Let’s explore this in the following.
The Interest Rates Mechanism
The FED uses interest rates to drive the economy and market participants towards the optimum level that maximises investments and keeps the currency’s purchasing power.
When the interest rate is low, loans become more affordable for businesses and individuals who seek various opportunities to invest, including Bitcoin, stocks and other tradable securities.
The overly-increased demand and growth can be harmful because the national currency can lose its purchasing power, and prices become unbearably high. Therefore, the FED increases the interest rate to limit the inflation rate and stabilise the economy.
The Impact Of Interest Rates On Cryptos
The changing interest rates have an indirect impact on cryptocurrencies because they change people’s trading strategies and ability to purchase Bitcoin and other cryptos.
When interest rates are high, people and businesses avoid excessive spending and limit their investments in unstable securities. Cryptocurrencies are highly volatile, and in an economic recession, they become less liquid and highly unstable.
On the other hand, when interest rates are lower, cryptocurrencies are more likely to boom, with more market participants purchasing and trading cryptocurrencies to maximise their wealth.
The interest rates’ impact on cryptocurrencies is evident in light of Bitcoin’s impact on financial markets and how people perceive them as tradable securities.
Lower interest rates encourage people and companies to invest more and purchase more cryptocurrencies, while higher rates deter the population from uncalculated investments, driving the demand lower for cryptos.