Interest rate increases by the U.S. Federal Reserve typically weigh on risk assets, including cryptocurrencies. When rates rise, safe assets such as Treasurys become more attractive, raising the likelihood that money flows out of riskier holdings. Since the Fed raised its benchmark rate by 0.25 percentage point on the 16th, the yield on the 10-year U.S. Treasury note has hovered around 5%. "Bitcoin tends to react more sensitively to changes in macroeconomic indicators than other assets," an official at a cryptocurrency exchange said on the 22nd.
Past price moves show the same pattern. A Seoul Economic Daily analysis of price trends for bitcoin (BTC), ether (ETH) and XRP from 2022 through 2026 found that bitcoin fell an average of 6.29% in the month following a Fed rate increase. Ether and XRP declined 4.35% and 5.44%, respectively.
The drop was steeper after July 2023, the most recent rate increase before this month's move. The Fed raised its benchmark rate by 0.25 percentage point to a range of 5.25% to 5.50% at the time. Over the following month, bitcoin fell 11.27% and ether lost 11.64%, while XRP plunged nearly 30%.
Higher rates lift expected returns on safe assets such as bonds while draining liquidity from the market, weakening demand for risk assets. In 2022 and 2023, the Fed's steep tightening coincided with major shocks in the crypto industry, including the collapse of Terra-Luna and the bankruptcy of FTX, adding to downward pressure on the market.
Rate cuts, however, have not consistently lifted cryptocurrency prices. In the month after each of the six rate cuts over the past five years, bitcoin returned an average of just 3.13% and ether fell 0.09%. XRP rose an average of 61.36%, but that figure was skewed by a surge of more than 369% in the month after the November 2024 rate cut.
The question is whether the return to rate increases, the first in three years and two months, will again lead to weakness. The Fed has left the door open to further tightening. In the dot plot released this month, the median projection for the benchmark rate at the end of this year was 4.1%, up 0.3 percentage point from June.
Markets swung sharply in the immediate aftermath of the increase. Bitcoin briefly slid to the $75,000 range, and major altcoins including ether weakened across the board.
The moves since then, however, have diverged somewhat from past tightening cycles. Bitcoin reclaimed the $80,000 level on the 18th and rose more than 5% on the 22nd, briefly topping $86,000. Ether and XRP also rebounded, gaining about 3% and 7%, respectively. With less than a week having passed since the rate increase, analysts say it remains to be seen whether weakness will persist through the one-month mark as it has in the past.
Industry watchers say much of the expected rate increase had already been priced in, limiting the impact of the actual decision. The liquidation of large short positions during the rebound is also cited as a factor that amplified the gains. "Bitcoin's 5% gain today reflects the liquidation of short futures contracts," said Jim Ferraioli, head of cryptocurrency research at Charles Schwab. According to CoinDesk, about $750 million in short positions were liquidated as bitcoin pushed past $82,000.
Some in the market expect bitcoin to climb above $90,000 if inflows through spot purchases and exchange-traded funds continue. Nikolai Sondergaard, senior analyst at Nansen, said buying in the spot and ETF markets needs to provide support, and projected that $90,000 and $92,000 would be the next major levels if bitcoin clears $87,000.
