What Does the 75-Basis-Points Fed Rate Hike Mean for Crypto?

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  • Today, the Federal Reserve raised its benchmark rate by 75 basis points.
  • This was the largest Fed rate hike since 1994.
  • Accordingly, many investors question how this increase will impact crypto.
Fed rate hike - What Does the 75-Basis-Points Fed Rate Hike Mean for Crypto?

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Among the risky assets investors are watching closely right now are cryptocurrencies. That’s partially related to today’s decision by the Federal Reserve to raise its benchmark rate by three-quarters of a percentage point. This Fed rate hike is the largest since 1994, and signals it will do what it takes to bring down inflation.

Stocks rallied on this news, as investor fears around inflation appear to be outweighing the downside impact higher rates have on valuations. But for crypto, a sector that’s been in a bear market since late last year, this news might not be as bullish.

That’s because many investors are now viewing these digital tokens as reflections of money supply. When cheap money abounds, it looks for places to earn the highest return. Through the end of last year, that place has been crypto. Many tokens saw triple-digit gains (or much more) on little more than speculation.

That said, as investors become more cautious, perhaps this crypto winter will continue. Let’s dive into what this rate hike could mean for investors in digital currencies.

What Does This Fed Rate Hike Mean for Crypto Investors?

In many ways, cryptocurrencies and high-growth tech stocks are quite similar. These investments are ones at the higher end of the risk spectrum. Accordingly, many of the same factors have driven both groups higher and lower in lockstep.

That said, today’s divergent price action among tech stocks and crypto could be signaling this correlation is overdone. That’s to say rate hikes might not benefit crypto in the same way they may benefit stocks.

The stock market appears to be taking the view that this inflation fight is more important to what could be a soft landing than accommodative monetary policy. Higher rates are already baked into the pie. Accordingly, for companies with cash flows, investors can look forward to perhaps the end of this madness.

However, in the crypto world, higher interest rates could mean less demand from retail investors. Higher borrowing rates across the board means less money to invest in high-risk assets. Additionally, as inflation surges, it’s unclear how much dry powder investors will put to work in investments that can gain (or lose) a lot of value in a short amount of time.

Right now, I think it’s time to be cautious and deliberate with one’s investing mantra. Accordingly, this rate hike could be a negative catalyst for cryptos from here.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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