Total Crypto Market Cap vs. Interest Rates
Updated
Interest rates set by the Federal Reserve (FED) have a significant impact on the total cryptocurrency market capitalization. By analyzing the relationship between these two factors, we can observe distinct phases in the crypto market's behavior in response to changes in interest rates.
Investors anticipate FED decisions:
It's important to note that changes in crypto prices often precede the FED's official decisions. Investors tend to anticipate the FED's next moves by analyzing economic indicators and positioning themselves accordingly. This means the crypto market often reacts to expectations of interest rate changes before they are officially announced.
- FED Increasing Interest Rates : When the FED raises interest rates, it often leads to money flowing out of the crypto market. Higher interest rates make traditional investments more attractive, reducing the appeal of cryptocurrencies. This results in a downtrend across all cryptocurrencies.
- FED Fixing Interest Rates at the Top : Once the FED halts interest rate increases and fixes them at a peak, the crypto market typically starts to recover. Bitcoin usually sees strong upward movements, while other cryptocurrencies experience more modest gains. This phase marks the beginning of a reversal to an uptrend.
- FED Lowering Interest Rates : When the FED begins to lower interest rates, the crypto market undergoes a short distribution phase. Investors reassess their positions, leading to some volatility. However, this phase is quickly followed by an upward trend as lower interest rates increase the attractiveness of riskier assets like cryptocurrencies.
- FED Fixing Interest Rates at the Bottom : When the FED fixes interest rates at a low point, there is a significant inflow of money into the crypto market. This period is characterized by aggressive price increases across various cryptocurrencies, with substantial pumps in market values.
Investors anticipate FED decisions:
It's important to note that changes in crypto prices often precede the FED's official decisions. Investors tend to anticipate the FED's next moves by analyzing economic indicators and positioning themselves accordingly. This means the crypto market often reacts to expectations of interest rate changes before they are officially announced.
Note
Valuable information doesn’t get enough attention ^^ . I won’t be exaggerating if I say that the explanations above are the heart of investing. Smart investors decide to allocate theire funds (or reduce exposure) depending on the direction of interest rate.
Note
People often view the Federal Reserve's dovish stance and interest rate cuts as positive. However, these rate cuts typically occur when it becomes evident that the economy is sliding into a recession, prompting the Fed to reduce rates in a reactive and urgent manner as the market is crashing.So it's normal to witness a market price decline when reducing IR before recovering up. This was the case in [2019-2020].
Note
3 scenarios for today :- If FED cuts IR by 0.25 point --> Bullish for the market
- If FED keeps IR --> Bullish for the market as investors will anticipate the rate cut in September
- If FED increases IR --> No data to do such decision :)
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.