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May 13, 2022  |  News

Rising Interest Rates and Bitcoin: What Investors Need to Know

(U.S News and World Report) Bitcoin’s story is changing as the cryptocurrency space develops. The crypto leader’s positive momentum has reversed this year as the market is experiencing seismic shifts. There are many factors contributing to Bitcoin’s price weakness, but a large part of it has to do with rising interest rates in an inflationary environment.

In April, the consumer price index, the standard gauge of inflation, was up 8.3% from a year ago, slightly lower than March’s 8.5% reading but still at historically high levels.

In an effort to reduce inflation in the economy, the Federal Reserve is moving toward a tighter monetary policy, as shown in its latest decision to increase interest rates by 50 basis points, the steepest increase in more than 20 years. The stock market has responded with an extended sell-off, with stocks across the board pulling back. Cryptocurrencies including Bitcoin, which trades under the symbol BTC, have been falling alongside them. The price of Bitcoin fell by 37% from the new year to May 12, and it fell more than 50% from its November all-time highs.

As the market expects inflation to stay above the Fed’s target, the central bank is expected to continue to hike interest rates throughout the year. If this scenario follows through, it is worth exploring these themes around what this means for Bitcoin and how crypto investors can respond:

  • Bitcoin’s correlation to the stock market.
  • Bitcoin is maturing.
  • How are Bitcoin investors reacting to interest rates?

Bitcoin’s Correlation to the Stock Market
The effect of rising interest rates on Bitcoin is the latest change that has been playing out in crypto. During this time, Bitcoin’s price has been nothing short of volatile. But Bitcoin is not alone. In fact, in the past several months, there have been high correlations between movements in Bitcoin and stock indicators like the S&P 500 and the Nasdaq.

Tech stocks in particular struggle with rising interest rates. The e-commerce giant Inc. (ticker: AMZN) is down more than 35% for the year through May 12, while Apple Inc. (AAPL) has fallen 18% during the same time and Meta Platforms Inc. (FB) has dropped more than 42%. Bitcoin is following this price action. The crypto leader’s value had been moving between $38,000 and $48,000 for months but recently fell below $30,000. This shows that investors currently view Bitcoin as a “risk on” asset.

Bitcoin followed the drawdown in the equities market, though not in a drastic way, says William Cai, partner and co-founder of financial services company Wilshire Phoenix.

Originally, Bitcoin was thought to be an uncorrelated asset to the broader stock market. In other words, Bitcoin and traditional assets like stocks and bonds would not necessarily move in tandem or in opposite directions, potentially making the cryptocurrency a portfolio diversifier that can help protect against downside risks of other assets. However, the correlation between stocks and Bitcoin has increased recently, and experts expect this correlation to continue in the near to medium term.

The current economic environment provides a ripe ground for large movements in risky assets. Bitcoin is accepted as an asset class, but it’s still considered a higher-risk asset, similar to speculative tech stocks. According to data by Arcane Research, the 90-day correlation between Bitcoin and the S&P 500 was 0.633 as of May 9.

“Short- to medium-term higher interest rates probably make for slightly less (of a) short-term bullish case (for) BTC,” says Andy Long, CEO of White Rock Management, a global digital mining company.

But in the long term, Long says, in an environment where there are higher interest rates, freer money and a return of quantitative easing, “BTC is hard money that isn’t going away.”

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