Why is the Bitcoin price reacting to US interest rates?

Key facts:
  • With the hike in interest rates in March and July 2022, the price of Bitcoin boomed.

  • In May and June, a price increase occurred in bearish stages for the price of Bitcoin.

While the US inflation numbers are growing month by month and approaching double digits, the Federal Reserve in that country has continued its strategy of tightening monetary policy. The medium-term goal is to stimulate savings and control inflation through a gradual increase in interest rates, making access to credit more expensive.

The US monetary authorities are walking a fine line Attempts to tame inflation may lead to stagnation. In fact, when the second consecutive quarterly economic contraction was announced on Thursday, July 28, the US economy was already in recession, CriptoNoticias reported.

In the first quarter of 2022, as shown in the graph, the decline in US GDP was 1.6%, followed by a contraction in the second quarter of 0.9%.

Percentage quarterly change in US gross domestic product. Source: Ministry of Commerce.

It is plausible that higher interest rates could have an effect on Bitcoin, as it makes loans, which some traders take advantage of, more expensive. By encouraging savings, liquidity is reduced, and thus risk appetite is reduced. On the other hand, expectations of a deterioration in the economic outlook are generating tension in the markets.

The effect of higher interest rates in the United States on the price of Bitcoin

In the latest rate hike in the US, by the Federal Reserve, markets including bitcoin and cryptocurrencies reacted positively, sending the price of BTC and major stocks higher. However, as indicated by the number of increases made this year, there has been no consolidation in the markets response.

The first increase this year came on March 16 of this year, and it was 0.25%, or 25 basis points. In base point (bps) notation, 100 points equal 1%. Immediately after the price increase was announced, there was a moderate drop in the price of bitcoin and stocks, followed by a quick recovery to pre-announcement levels.

Although the effect from the interest increase was minimal on the day of the announcement, That week saw the start of a bullish wave that ended at the end of March And it took the price to one of the highest values ​​for the year, above $48,000.

The second rate hike, which was announced on May 4, occurred in a downward phase for six consecutive weeks, and the Federal Reserve doubled the increase in March and set it at 0.5%. This time the market reacted the opposite of what it did in March: there was an initial rally after the announcement, but after closing on May 4 near $40,000, Bitcoin the next day lost 10% of its price and continued into the fall. Four more days.

The initial bullish reaction in March, before the price reversal, may have been due to Jerome Powell’s claim that the Fed ruled out a 0.75% rally. Specifically, before the occurrence of inflation that did not deliver despite the increases in interest rates, the Federal Reserve decided to rise to 0.75% or 75 basis points, an increase that was implemented last June 15. This third increase also highlighted a descending line that was running through Bitcoin, which not only contributed to the notorious losses in June; It also pushed the price to a 2022 low of $17,500.

US interest rate increase, by the Federal Reserve in 2022. Source: TradingView.

What happened to the price of bitcoin for the month of July?

The market weighed two scenarios for an increase last Wednesday: Repeat 75 basis points or apply 100 basis points. The fact that the most anticipated option was given, the increase by 0.75%led to moderate momentum for both stocks and bitcoin The period for the next increase, which will be announced on September 21, has also been extended.

The price increases, so far, do not appear to be taming inflation as the Fed is hoping, and for bitcoin, the effect is not clearly defined. With two increases that boosted the price, namely May and June which were bearish; We keep waiting for what might happen soon in September.

The path that inflation follows in the next two months is crucial to assessing the impact of the next increase. An improved economy can affect Higher rates reduce their impact on the price of Bitcoin. But the most price-appropriate element is boosting demand, which very likely makes Bitcoin more immune to macroeconomic decisions.

 

 

 

 

 

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