The cryptocurrency market has kept its close trading relationship with the stock market throughout the weekend. Jerome Powell, the chairman of the Federal Reserve, stated on Friday that the Fed will maintain its stringent interest rate policy until it has achieved price stability. As a result, investors are dumping riskier assets because they expect interest rates to continue high.
Ethereum (CRYPTO: ETH) had decreased 7.1%, Bitcoin (CRYPTO: BTC) had decreased 3.5%, and Solana (CRYPTO: SOL) had down 5.7% in the previous day as of 1:30 p.m. ET. The majority of the decline took place on Friday or early Saturday, and by Saturday noon, the market had stabilized.
Powell is present at the Economic Symposium, an annual gathering that is closely watched by investors, in Jackson Hole, Wyoming. He would not specify whether rates would increase by 50 or 75 basis points, but it was obvious that bringing inflation under control was more important than maintaining economic growth.
Because businesses can’t raise capital at rates that are as appealing as when rates are low, higher interest rates have a tendency to slow the economy down. This may have the effect of driving investors away from risky investments like cryptocurrency and toward higher-yielding assets like dividend stocks or bonds.
I’d be most worried right now about the economic slowdown aspect. Despite the rise in rates, the jobs statistics has been solid for the majority of 2022, but that won’t stay forever. People would have less money for discretionary expenditure if employers reduced employment or even laid off workers.
Because consumers are saving more money and are willing to speculate on highly speculative goods, cryptocurrency has benefited immensely. The cryptocurrency market might still decline if that money stops flowing.
Although the actions of the Federal Reserve don’t directly affect cryptocurrencies, they may have second and third-order repercussions. Since many early cryptocurrency products generate yields, they will face competition from traditional markets’ higher interest rates. They may become less competitive as a result in the market. Additionally, it implies that staking-enabled cryptocurrencies like Ethereum or Solana will be somewhat less appealing compared to dividend-paying stocks and bonds.
It is only natural on a day like this for riskier assets like growth stocks and cryptocurrencies to flood the market. However, rather than representing a fundamental shift in the competitiveness of cryptocurrencies, it is more of a market dynamic.
What should investors do at this time? Higher rates, in my opinion, won’t substantially alter the current disruption or advancements in crypto. Smart contracts are the foundation of cryptocurrencies like Ethereum and Solana, and businesses are creating products with the blockchain at their center. Even with increased interest rates, that remains the case.
Although logical, the response to the Federal Reserve’s discussion of rates shouldn’t raise any alarms. Due to its volatility, cryptocurrencies have been trading side by side with erratic stocks for the past year. That is what is happening right now; it is not a worrying action based on something more basic.