The Federal Reserve is believed to have massive influence on the financial markets, including the rising and crashing of cryptocurrency prices. In particular, recent news suggests that Bitcoin prices drop to $43.7K after Fed minutes re-confirming plans to hike rates. This introduces the topic – how does the Fed affect Bitcoin prices?
This paper will provide an in-depth overview of how changes in Federal Reserve policy influence Bitcoin prices. It will discuss how decisions made by the Federal Reserve such as increasing or decreasing interest rates affect domestic and international macroeconomic conditions which, when combined with other factors, eventually determine Bitcoin price movements. Additionally, this paper will discuss other key aspects of market activity that can contribute to movements in Bitcoin prices such as speculation, transaction volume, and liquidity impacts.
Finally, this paper will explore alternate theories on why the current relationship exists between Bitcoin prices and Federal Reserve policy changes.
Bitcoin price drops to $43.7K after Fed minutes re-confirm plans to hike rates
As the world’s leading central bank, the Federal Reserve’s actions have the power to influence financial markets, including the price of Bitcoin. Recently, the Fed minutes re-confirmed plans to hike rates, leading to a sharp drop in Bitcoin prices, from nearly $50K to $43.7K.
In this article, we will explore further the relationship between the Fed and Bitcoin prices, as well as what other factors can impact the digital currency’s price.
How the Fed sets interest rates
The Federal Reserve, or “the Fed,” is the central bank of the United States and has been since 1913. Its mission is to promote maximum employment and price stability while maintaining a stable financial system. While this would seem simple, it involves many moving parts — one of which is interest rates.
Interest rates stimulate or slow economic activity by influencing the cost of borrowing and overall demand in the economy. The Fed can raise or lower interest rates by increasing or decreasing the federal funds rate (FFR). This key rate plays an important role in defining other short-term (and long-term) interest rate targets in the economy.
When the FFR is increased, it leads to higher interest rates for borrowers across all types of loans, such as mortgages and car loans. But it also affects Bitcoin prices because when the FFR increases, it reduces demand for Bitcoin due to its perceived riskiness — investors become less willing to hold Bitcoin when there are higher returns from safer investment options. As a result, Bitcoin prices tend to drop when news about a Fed meeting reveals plans for further hikes in interest rates and vice versa when plans suggest rate cuts will occur.
Rates cuts have already been implemented to support US economies affected by COVID-19 lockdowns – some experts argue that these low interest rates won’t last forever due to inflationary pressures caused by fiscal stimulus initiatives put in place by governments around the world, meaning at some point in 2021 we may see another uptick in FFR which could affect Bitcoin prices once more.
How the Fed’s monetary policy affects Bitcoin prices
Many speculate that the Federal Reserve’s monetary policy and interest rate decisions significantly affect Bitcoin prices. Generally, when the Fed introduces higher interest rates, this reduces demand for assets such as stocks and cryptocurrencies. This is because investors tend to invest in higher yielding assets to get a better return on their money. On the other hand, when the Fed cuts interest rates and makes borrowing cheaper, there is an increase in demand for stocks and cryptocurrencies as investors can borrow more cheaply to buy them.
High interest rates tend to be bearish for Bitcoin prices while low-interest rates are bullish. What’s more, Bitcoin prices often move in sympathy with the US Dollar; when there is monetary policy tightening such as quantitative tightening (QT) or inflation fear due to hawkish rhetoric from the Federal Reserve Chair Jerome Powell, USD strengthens; leading to weakness in other asset classes such as cryptocurrencies. On April 28th this year (2021), after news of the Fed confirming plans to raise interest rates despite weak economic data, discouraged investors sent Bitcoin prices down below $43k mark setting it back months of progressive growth since January 2021.
The key takeaway from all of this is that investors should pay attention to news from the Federal Reserve when making their investing decisions related to cryptocurrencies such as Bitcoin; whether it be rumors about Quantitative Easing or a rate hike or even an impactful speech by a Federal Reserve official—the market will shift accordingly and could result in either rapid gains or losses depending on what kind of action was taken by The Fed’s monetary policy makers.
The Recent Fed Minutes
The Federal Open Market Committee of the United States recently released minutes that discussed their plans to increase interest rates. Unfortunately, this news affected the Bitcoin prices, causing them to drop to $43.7K.
We’ll look at how the Fed’s plans to hike rates have impacted Bitcoin prices and other cryptocurrencies.
What was discussed in the recent Fed minutes
On April 28th, 2021 the Federal Reserve released their minutes from the most recent Federal Open Market Committee meeting, which outlines the plans and goals regarding the country’s economic policies. In addition, the Fed discussed their projections on the economy going forward and reiterated their intention to hike rates when appropriate.
The Fed highlighted their assessment of current economic conditions – that expansion was moderating while inflation was picking up and labor markets continued to improve. The Fed also mentioned how they would continue supporting households, businesses, and communities – including fiscal support from Congress. They also noted that inflationary pressures from commodity prices have been rising recently culminating in a rise in overall inflation expectations.
The Fed minutes included an outlook for rates going forward with most participants expecting an appropriate rate increase during 2022. This announcement caused some little concern amongst investors as Bitcoin prices fell just below $44K following this announcement. However, it appears that these investors are mindful of how changes in monetary policy can affect asset prices and overall confidence in the economy going forward. Hence, they reacted strongly to this news from the Fed minutes. As such, it will be interesting to see whether or not this sets a trend going forward with possible rate hikes set to come sooner rather than later as mentioned in the statement.
How the Fed’s decision to hike rates affected Bitcoin prices
The Federal Reserve’s decision to hike rates could affect Bitcoin prices. Higher interest rates are generally seen as negative for cryptocurrency prices, as the cost of borrowing money increases.
When the Fed hikes interest rates it affects all financial assets, including Bitcoin. On Wednesday, April 21, 2021 the Federal Reserve announced that it would maintain its target rate at near-zero levels and continue buying government bonds and mortgage-backed securities to boost economic growth. While this decision was largely expected, it re-confirmed that the Fed will eventually start hiking rates once the economic recovery is well underway.
In response to this news, Bitcoin dropped over 9%, falling from around $47K to $43.7K in 24 hours. This drop could be attributed to investors expecting more downside risk due to higher borrowing costs soon if rates increase. Additionally, when central banks make decisions which affect global markets, investors tend to flee riskier investments such as cryptocurrencies seeking safe havens such as gold or government bonds instead amid uncertainty.
What to Expect Going Forward
Bitcoin prices dropped to $43.7K on Wednesday (May 12th) after the Fed minutes confirmed the plans to hike interest rates. As Bitcoin is highly sensitive to news and investor sentiment, the news caused a dramatic drop in the value of the cryptocurrency.
But what can investors expect going forward? First, explore the factors that could further influence Bitcoin price changes.
What could the Fed do to further affect Bitcoin prices
The Federal Reserve’s monetary policy significantly impacts the performance of the U.S. economy, and by extension, Bitcoin prices. If the Fed takes action to increase or decrease interest rates or other monetary variables, it can cause a shock across markets that can also affect Bitcoin prices.
It’s important to understand how the Fed may continue influencing Bitcoin prices to predict future moves and adjust your strategy accordingly.
The Federal Reserve does not have direct control over Bitcoin prices. Still, if it takes quantitative easing (QE) or increases its asset holdings and interest rate decisions, these changes can trigger large capital flows into different market sectors (including cryptocurrencies). In addition, by increasing their asset holdings and lowering borrowing costs, new sources of liquidity with an inherently lower cost of capital flows into alternative investments like digital currencies.
The size and scope of QE programs tend to be determined by how close the U.S. economy is thought to be in terms of achieving full employment levels and price stability (inflation), which will both have an effect on investor sentiment — meaning that more stimuli could signal more confidence in future price movements resulting from widespread adoption or innovation on existing products (like improved crypto trading methods). Furthermore, since crypto investors are always looking for the best opportunities to maximize returns on their investments, further steps taken by the Fed could be extremely important in influencing short-term supply-side conditions for digital currencies like Bitcoin.
What should investors be aware of when investing in Bitcoin
Investors looking to invest in Bitcoin should be aware of the high risk nature of this fin-tech asset and any possible outcomes associated with holding the digital currency. In addition, as with any investment, due diligence is essential to understanding the Fed’s role in regulating Bitcoin prices, which primarily relates to its interest rate policy.
When investing in digital assets, investors need to be mindful that changes to monetary policy can immediately impact their investments. In particular, changes in interest rates can have a direct and sometimes unpredictable effect on the price of cryptocurrencies like bitcoin.
For instance, when the Federal Reserve announced that it would keep rates near zero for a “considerable time” during its April meeting minutes, point-to-point cryptocurrency bitcoin dropped more than 5% and plummeted from almost $45K down $43.7K. This was mainly because investors began to price in the expectation that interest rates would increase over time as growth and inflation picks up, resulting in less demand for riskier investment options like cryptocurrencies as investors seek more reliable options such as stocks or other banking products instead.
Therefore, going forward investors must acknowledge how volatile these markets are compared to traditional investments (stocks) and be mindful of how rapidly prices can change based on changes to monetary policies influenced by external economic factors.
Conclusion
In conclusion, the Federal Reserve’s monetary and economic policy decisions, particularly regarding interest rate hikes, have significant ripple effects on the price of Bitcoin. Bitcoin prices have been known to drop when the Fed plans to raise interest rates, indicating that cryptocurrency investors are considering the potential impacts of this action. Furthermore, higher interest rates mean less demand for alternative investments like bitcoin.
However, with the overall outlook for 2021 remaining positive despite any changes in Bitcoin’s market due to inflation or other external factors, it is important to remember that at its core, Bitcoin is still a risky but profitable asset with enormous potentials.
