What happens if the Federal reserve system changes the rate?
The Fed finished its unexpected and expedited conference last Monday with the conclusion that it will remain the interest rate to be steady at an acceptable rate for a while before having any further adjustments. After this news, the Crypto market immediately gets tremendously hopeful and bullish as the BTC price got back to around the 44k milestone.
Do you know the mechanism why the interest rate adjustments are able to strongly affect the crypto market?
If the Fed increases the interest rate.
The economy will be slowed down since funds and investors become less intrigued to borrow money from the Fed due to a higher interest rate. This means that businesses will be deeply discouraged and borrow less money from the Fed because of the increased cost of borrowing. In addition, consumers who bet in Governance Bond are prone to sell their venturing assets like Bitcoin to purchase more Bonds.
Based on all things taking place above. The total money flow to be deposited into all markets including the crypto market is consequently considerably limited. As a result of that, the crypto market is threatened to extremely crash down as no smart money flowing into in order to raise the crypto assets’ demand, and most crypto investors, later on, tend to sell their tokens to buy more governance bonds, which is seen as a safer and more profitable investing channel.
If the Fed decreases the interest rate.
The economy will conversely react in contrast to the first case of increasing the rate. Specifically, if the Fed cuts interest rates, consumers will earn less interest on their savings when holding the Governance Bonds. This would therefore result in a significant reduction in the number of individuals investing in Governance Bonds and beginning to venture into other markets like crypto. Besides, big institutions have more incentive to implement the act of borrowing money from the Fed since the interest rate now is low.
n a nutshell, when the interest rate witnesses a decrease in its value, more money will be deposited to various markets and the price of assets like stocks and cryptos tends to increase due to the appearance of additional smart money.
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