How US Federal Reserve Rates affect the Crypto Market

One major factor that influences the Crypto Market is the US Federal Reserve’s decisions on interest rates. For example, Bitcoin’s price surged by over 20% in the first quarter of 2023, coinciding with the Fed’s shift towards a less aggressive rate hike policy. Why is the crypto market so sensitive to these rate cuts? How do these decisions impact investors? In this blog, we will explore the underlying mechanisms and their effects.

Impact of US Federal Reserve Rate Cuts on Cryptocurrency

The Federal Reserve (the Fed) is the bank of banks in the US, similar to what RBI is for Indian banks. 

The Fed sets the interest rates for banks lending money to each other. When the Fed cuts interest rates:

• Banks can borrow money more cheaply.
• They pass on these lower rates to customers.
• People and businesses have more money to spend and invest.

This causes 

• Investors move to riskier assets like crypto for higher returns.
• Which Increases the demand for crypto 
• And drives its prices higher.

In essence, Fed rate cuts can stimulate the economy, potentially leading to increased demand for Bitcoin and increase in its price.

December 18 2024 Fed Rate Cut

On December 18, 2024, the Federal Reserve (Fed) announced a 25 basis point cut in its benchmark interest rate, marking the third consecutive reduction of the year. This widely anticipated decision lowered the federal funds rate to a target range of 4.25% to 4.50%, a level not seen since December 2022.

Following the announcement, stock markets reacted negatively, with major indices like the S&P 500 and Dow Jones Industrial Average experiencing declines. 

Impact on Indian Markets

• BSE Sensex: The index opened at 79,029.03, down by 1,153.17 points (1.44%).
• Nifty 50: It opened at 23,877.15, down by 321 points (1.33%).

Impact of December 18 2024 Fed Rate Cut on Crypto Markets

The overall sentiment in the crypto market mirrored that of traditional markets. The cryptocurrency market also experienced volatility following the Fed rate cut announcement.

• $675 million in liquidations occurred within a 24-hour period as a response to the Fed’s decision. 
• Bitcoin and Ethereum experiencing long liquidations exceeding $100 million each.
• Altcoin performance dropped.
  • Ethereum dropped over 6%
  • Solana over 10%

Cryptocurrencies may decline in the short term as a consequence of the Dec 2024 Fed Rate Cuts, but experts are optimistic about their long-term growth, expecting renewed interest as the economy stabilizes.

What is the Federal Reserve?

The US Federal Reserve, often simply referred to as the Fed, is the central banking system of the United States.

The Fed operates similarly to central banks in other countries, such as the Reserve Bank of India (RBI) and the European Central Bank (ECB). Its primary role is to manage the nation’s monetary policy by regulating the supply of money and interest rates at which banks lend to each other overnight.

Changes in this rate directly influence other interest rates in the economy, such as mortgages, loans, and credit card rates.

Additionally the Fed also sets the Discount Rate, the interest rate at which banks can borrow directly from the Fed. Adjusting this rate helps influence broader market interest rates.

• The changes in rates by the Fed can encourage spending and investing, helping to stimulate economic growth.
• Similarly, rate cuts usually happen when the economy is slowing down. The Fed lowers rates to try and boost spending and make it easier for people to borrow money to buy homes, cars, or start new businesses.
  It’s a way to prevent the economy from dipping into a recession by keeping money flowing. Lower rates can also help boost stock prices and, by extension, make riskier investments like cryptocurrencies more appealing.

What are US Fed rate cuts and why do they occur?

When the news refers to US Fed rate cuts, they are typically referring to the Federal Funds Rate. This is the primary interest rate that the Federal Reserve directly controls and adjusts to influence the U.S. economy. 

The Federal Funds Rate is the interest rate at which depository institutions (banks) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Changes to this rate are a direct tool of monetary policy used by the Fed to manage economic conditions like inflation, employment, and overall economic growth.

Impact on Financial Markets

When rates are low, people are more willing to take on higher risks, moving towards assets like cryptocurrencies for potentially higher returns.

Lower interest rates make bonds less attractive, especially for newer investors, because their yields are lower compared to other investments. 

This can push investors towards stocks and real estate, looking for better returns. Lower rates also increase the amount of money available for borrowing, which can boost economic activity. On the other hand, higher rates can reduce borrowing and investment, decreasing market liquidity and possibly lowering asset prices.

Experienced investors, on the other hand, may view rate cuts as a signal of economic uncertainty or inflation risks. These investors are more attuned to market cycles and economic indicators, making them more likely to diversify their portfolios with cryptocurrencies as a hedge against traditional market volatility.

Conclusion

The Fed’s monetary policy is a key factor that influences the crypto market. Rate cuts can encourage investment in riskier assets like cryptocurrencies, which can lead to increased demand and higher prices. However, it’s important to remember that crypto remains a volatile asset class. This is where Mudrex comes in. Our platform offers a safe and simple way to invest in crypto, with features that enable you to start investing easily, manage risk and potentially maximize returns. Start your crypto journey with confidence – choose Mudrex.