The impact of rising interest rates on the volatile crypto market

 

Crypto is usually seen as volatile as a newer asset class, with the potential for big upward and downward moves over shorter time periods.

Volatility is a metric that measures how much the price of a given asset has changed over time. In general, the more volatile an asset is, the riskier it is to invest in it — and the more potential it has to produce either bigger returns or higher losses over shorter time periods than less volatile assets.

Considering the globally rising inflation and the unpredictability in regards to Russia’s invasion of Ukraine, Interest rates are expected to rise. This would certainly have an impact on the crypto market, more so as it is already volatile as a result of its latterly positive correlation with the stock market among other reasons. The impact may or may not be adverse.

Investors initially regarded cryptocurrency as a low-risk high-return asset that may guard their investments against an overall impoverishment. But lately, it has been acting like volatile stocks, not entirely able to rise back to its previous stature after its fall below $40,000 at the beginning of 2022.

Bear Market or Bull Market?

The price of Bitcoin was at its highest in November last year – at around $69,000, from which it dropped by an estimated 38%. Now with conditions coherent to rising interest rates, the crypto market is likely to continually face a downfall in price. This would filter out many of the regular investors that are looking for short-term profits but would not hinder the interests of the more significant parties, as they would be looking at its long-term implications. 

Although the current instability would result in a risky situation at the earlier stages, rising interest rates may even indicate economic stability which could, in turn, result in the crypto market recovering and developing further. On the backhand, rising interest rates can be considered as indicators of economic growth (because they are implemented to control inflation, which on its own is a possible indication of economic growth, depending on the magnitude), which is an implication that employment is rising and therefore so is the income per capita, resulting in recuperating markets. 

Developments within the Crypto Market

 

Bitcoin has once before suffered from such a fall in value, during the period between 2017 and 2018, however, the crypto market was not as developed as it is now when investors of the likes of Paypal have entered into the market. Even then, investors with more long-term foresight did not exit the market, it may be a similar situation now. The crypto market is constantly experiencing expansion, in the sense that more and more sectors are adding up into the market after Bitcoin. Crypto now also includes Ethereum, Litecoin, Cardano, and Dogecoin among several others that are all digital assets that may be transacted across blockchain systems.

Emerging Sectors of the Crypto Market

An important and more talked-about sector of crypto is NFTs. These broke through and came more into the mainstream hence were largely invested last year, resulting in a drastic growth in demand for them, shaking both the crypto market as well as the market for digital art. This was the case even though many people – to date, have not entirely understood the nature of NFTs. Various uses of the digital commodity have still not been grasped. 

At present, NFT trading is restricted to digital artwork and cartoon or game characters whereas it can also be employed for the authentication of the products one is purchasing because the entire journey of a product from production to the hands of a consumer would become transparent. Moreover, it may be used in voting, ticketing, medical records and to represent academic credentials – all of these being everyday uses for NFTs. So to say that NFTs have not truly been utilized yet would not be wrong, as it is apparent that it shall provide ease in everyday transactions and also provide a level of transparency to transactions related to tangible and intangible properties. Further developments in regards to NFTs should be expected at a rapid pace.

Decentralized Finance or DeFi is another form of crypto which is yet to be fully explored, although there has recently been a rise in demand for it. DeFi is the provision of financial instruments operated on a blockchain system but without any intermediaries such as banks or other financial institutions. It is simply open to the general public and not held under the authority of any party, hence the term ‘decentralized’. At present, it is uncertain and not as conveniently put to use yet, as it is still in its very initial stages: not easy to use and not as accessible. Similar was the case with bitcoin when it initially came into the market, it was inconvenient to purchase and trade until a few companies eased the process and made it accessible to the general public. Just like bitcoin, DeFi also needs such companies to bring DeFi to the mainstream and ease its trading. The impact on crypto as a result of this may or may not be positive, depending on the magnitude by which it rises.

Short-term/ Long-term Investors

It can therefore be concluded that all the sectors included within the ‘crypto’ category still have a lot of space for further development which would allow the crypto market to bear a negative impact that the rise in interest rates may have on it, in the long run. It may also be said that the crypto market would initially be at a downfall, so for the regular investors, it may be necessary to assess the effect on each individual digital asset or they may even pull out. It may be an opportunity for them to be able to invest in the momentarily lower in value assets. The rise in interest rates would hardly disturb the long-term investors that are not obstructed by price fluctuations and short-term losses. Rather they are focused on the long-term conditions of the market, as well as the long-term economic conditions of the country in question. They may be seen to further invest in Bitcoin for example, which may be falling in value, but may arise in the future owing to stability in economic conditions indicated by rising interest rates, bringing their investment portfolios into a profitable position. With the continual growth and development in the various sectors of the crypto market, its volatility may carry on, however it shall bring further prospects and opportunities for investments with itself.