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How will cryptocurrencies react to rising US interest rates?

  • New territory for cryptos
  • So far, so good – not
  • Creating a forward curve is crucial
  • A regulatory weapon
  • Expect volatility as there is no historical precedent

For most of 2021, the Federal Reserve and US government blamed “temporary” pandemic-related supply chain bottlenecks for rising prices. The term has become a rallying point for Fed critics, who blame the central bank for the highest inflationary pressures in more than four decades. While characterizing the inflation While the government deemed “temporarily” politically convenient rhetoric, it was unforgivable for the politically neutral central bank.

In late 2021, as FOMC members witnessed the revelation that the economic picture was structural rather than temporary, the Fed continued to crawl at a snail’s pace to address rising prices with monetary policy. Quantitative easing, which pushed interest rates further down the yield curve, did not end until early March 2022, and the exit from a 0% Fed Funds rate did not occur until the March 2022 meeting. Meanwhile, it rose to 8 in March 2022 .5% and 11.2%, respectively, the highest levels in four decades. Now the Fed is way behind the inflation curve. cryptocurrencies don’t have much experience in an inflationary environment where the Fed is raising interest rates.

This is what awaits you in this article

New territory for cryptos

Many proponents of the cryptocurrency market viewed the asset class as a hedge against inflation. The economic situation is eroding the value of fiat currencies as governments are free to issue legal tender to their heart’s content, thereby expanding the money supply. Crypto stashes are limited to mining and other activities, making them an alternative to fiat as the conventional money supply grows to fuel the economy.

Inflation started to rise in the second half of 2020 and continued to explode in 2021. Leading cryptocurrencies hit record highs on November 10, 2021 as inflation surged and monetary policy lagged far behind the inflation curve.
How will cryptocurrencies react to rising US interest rates?, Crypto Trading News
Source: bar chart

The chart shows a high of $68,906.48 on November 10, 2021.
How will cryptocurrencies react to rising US interest rates?, Crypto Trading News
Source: bar chart

hit a record high of $4,865.426 on the same day. Leading cryptos tumbled lower, hitting recent lows on Jan 24, 2022.

On Wednesday, interest rates rose 50 basis points, outlining plans to reduce its swollen balance sheet. As the Fed addresses rising inflation, crypto assets remain closer to the Jan. 24 low than the Nov. 10, 2021 high.

So far, so good – not

The tidal wave of central bank liquidity and tsunami of government stimulus that began in 2020 planted inflationary seeds that germinated in the second half of 2020 and bloomed in 2021 and the first four months of 2022. The Fed is now tackling inflation, but the war in Ukraine is adding another dimension to the economy.

Commodity prices recently fell from multi-year, or in some cases new all-time highs, but they remain closer to the highs than the lows. BitcoinEthereum, and many other cryptos are either telling us that the Fed will have a significant impact on inflation, or they are not inflation hedges and barometers. Ethereum was $2,830 on May 3 while Bitcoin was at $38,325.

So far, cryptos have not been the inflation barometers that many were hoping for, but they are responding to a rising interest rate environment as prices remain low compared to mid-November 2021 highs.

Creating a forward curve is crucial

Cryptocurrencies remain an emerging asset class that has made strides toward the mainstream, but they still lack the liquidity of the stock, bond, traditional currency, or commodity markets. Additionally, many voices refuse to recognize their value, utility, and role as assets.

Last weekend at the Berkshire Hathaway (NYSE:) annual carnival in Omaha, Nebraska, corporate oracle and famed investor Warren Buffett said:

If you told me that you own all the bitcoins in the world and you offered them to me for $25 I wouldn’t take them because what would I do with them? I’d have to sell it back to you one way or another. It won’t do anything.

Buffett doesn’t think Bitcoin or the other 19,200+ cryptocurrencies are “productive assets.”.” His plaintext partner, Charlie Munger, went further and said:

In my life I try to avoid things that are stupid, evil and make me look bad in comparison to everyone else – and bitcoin does all three.”

Munger went on to say that Bitcoin is “stupid because it’s still likely to go to zero, and evil because it undermines the Federal Reserve System.”

When it comes to comparisons, he quotes “the communist leader in China. He was smart enough to ban bitcoin in China.”

In response, Elon Musk cynically tweeted:

Haha he says bitcoin so many times.”

The tension between proponents and detractors continues as a debate over the future of the cryptocurrency asset class. One of the crucial goals for cryptocurrency growth is to establish a liquid and transparent futures curve to set future values.

A regulatory weapon

US regulators have not supported a lend-and-lease cryptocurrency business, which is the key factor creating future value. While the CME launched mini-bitcoin and Ethereum futures options, the futures curve remains illiquid, limiting the asset class’s growth.

Regulators claim that allowing cryptocurrency borrowing and lending would increase illicit use of the financial instruments. In Munger’s comments, however, are the underlying reasons for the regulatory Resistance hidden. “Undermining the Federal Reserve System” is the most telling comment as cryptocurrencies take control of the money supply away from governments and hand it back to individuals as the price level is solely a function of bids and offers for the cryptos.

The bottom line is that the regulatory roadblock before a forward curve is a frontline in the war between traditional financial interests and the evolution of the fintech revolution and regulators’ crypto-destruction weapon.

Expect volatility as there is no historical precedent

While rising inflation and higher interest rates can affect cryptocurrency values, there is no historical data. The asset class is only a dozen years old and hasn’t experienced economic cycles. Additionally, active trading and investing in cryptos has only occurred in the last five years since the CME introduced bitcoin futures and increased the liquidity of the market. A forward curve would do much to promote liquidity, but the war between critics and proponents is likely to continue to thwart the move towards mainstream assets.

Cryptos remain highly speculative financial products with the potential for ubiquitous utility that threatens the status quo. Traditional financial institutions and governments will continue to put up roadblocks while crypto enthusiasts and speculators will find ways to bypass them. Expect a lot of price swings in the market that creates historical precedents every day but has few to justify price movements. The impact of rising US interest rates on the asset class is still unclear and identifying patterns that could create correlations will take months, if not years.

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Source: Crypto News Deutsch

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