Interest rate increases by the U.S. Federal Reserve weigh on prices of risk assets, including cryptocurrencies, as money shifts into safe havens such as Treasurys. After the Fed raised its policy rate by 0.25 percentage point on the 16th, the yield on the 10-year U.S. Treasury note has been hovering around 5%. "Bitcoin is especially sensitive to macroeconomic indicators," an official at a crypto exchange said on the 22nd.
The numbers bear this out. A Seoul Economic Daily analysis of price trends for bitcoin, ether and XRP from 2022 through 2026 found that bitcoin fell an average of 6.29% in the month following each of the Fed's six rate increases. Ether and XRP, the leading altcoins, dropped 4.35% and 5.44%, respectively.
The decline was particularly steep in July 2023, the most recent rate increase before this month. After the Fed lifted its target range by 0.25 percentage point to 5.25%-5.50%, bitcoin fell 11.27% and ether 11.64% over the following month. XRP plunged nearly 30% in the same period.
When rates rise, expected returns on safe assets such as bonds improve and market liquidity shrinks, damping demand for risk assets. Losses deepened in particular during 2022 and 2023, when the Fed's aggressive tightening coincided with problems inside the crypto market itself, including the Terra-Luna collapse and the bankruptcy of FTX.
Rate cuts, by contrast, have not produced a clear upward trend. In the month after each of the six rate cuts over the past five years, bitcoin returned an average of just 3.13%, while ether slipped 0.09%. XRP averaged a 61.36% gain, but that figure was inflated by a surge of more than 369% in the month after the November 2024 rate cut.
The question now is whether the same pattern will hold after the Fed's first rate increase in three years and two months. Caution has grown further because the Fed has left the door open to additional increases. In the dot plot released by the central bank, the median projection for the policy rate at the end of this year rose to 4.1%, 0.3 percentage point higher than the June forecast.
The crypto market did swing sharply immediately after this month's increase. Bitcoin slid to the $75,000 range at one point, and major altcoins fell across the board.
Still, some say it is too early to predict whether the market will follow its past course, because recent price action looks different. Bitcoin recovered the $80,000 level on the 18th and then jumped more than 5% on the 22nd, briefly breaking above $86,000. Ether and XRP also rose about 3% and 7%, respectively.
Industry participants say concerns about a rate increase had already been priced in, limiting the actual impact of the move. Some analysts say the rebound was amplified by large-scale liquidations of short positions as prices recovered. Jim Ferraioli, head of digital asset research at Charles Schwab, said the 5% gain in bitcoin was driven by the liquidation of short futures contracts. According to CoinDesk, a crypto news outlet, about $750 million in short positions were liquidated as bitcoin pushed above $82,000.
Some see room for bitcoin to climb past $90,000. Nicolai Sondergaard, a senior analyst at Nansen, said spot and exchange-traded fund buying needs to provide support, and projected that bitcoin could rise to $92,000 if it clears $87,000.
