The crypto market has taken a hit following the statement of the Federal Reserve Chairman, Kay Powell, that the agency plans to move faster in raising interest rates.
According to Powell, a proposed 0.5% interest rate hike has been on the table since last May but has not been implemented. As a result, Bitcoin’s price dropped to $40,868 from a high of $42,965, while the entire crypto market’s valuation is down to $1.88 trillion.
The crypto industry continues its trend of going hand in hand with the performance of the tech industry as the Nasdaq also slumped in value by 2%. The lowest drop it has experienced since the middle of last month.
James Bullard, president of the St. Louis Federal Reserve Bank, disclosed that he believes interest rates will gradually climb to 3.5% in 2022. Accordingly, the FED would have to consistently raise the rate by 0.5% at each of their remaining board meetings before the expected increase would be achieved for the year.
Meanwhile, the FED revealed that the 0.5% increase had been the adopted rate. To begin with, Bullard’s prediction for the interest rate increase appears spot on.
Reasons for Raising the Interest Rate
Industry insiders believe that the main objective of the proposed interest rate hike is to combat rising inflation, which jumped to 8.5% in March. Moreover, the tech industry is regarded as a high-growth investment space that is eligible to be included in the discounted cash flow model used for classifying industries by the Federal Reserve.
The model considers the overall interest rates in its calculations, and where there is a higher interest rate, the valuation is deemed below.
Going by the unstable global economy that renders funds susceptible to periodic inflation, it is considered that investment in some relatively safe products like the U.S Treasuries is becoming more attractive amid rising interest rates.
Furthermore, returns in this type of investment are guaranteed most of the time, in contrast to an investment in crypto, where there is high risk with the attendant market volatility.
Bitcoin is considered a perfect hedge against inflation in the crypto market. But given its price volatility and the nature of the crypto market, it might struggle to fit into the global economic navigation to curb rising inflation.
Despite its adoption, many experts believe that Bitcoin has not attained the stage where it can be used as a hedge by fund managers and asset owners because of its price action, which is subject to sudden change, especially when the entire crypto market is in a storm.
As a result, it was expected that Bitcoin would overtake gold as a fund reservoir, evidenced by the movement of significant assets to gold reserves at the beginning of the Russian-Ukraine conflict. Over time, gold became the go-to reserve for moving funds over Bitcoin.
The Fed believes that by raising interest rates, inflation can be curtailed, but what becomes of the crypto market?