How Fed Rate Hike Impacts Bitcoin Market?

While the Bitcoin communities are getting too indulged in blaming Evolution Marketplace for the recent $50 crash, it seems they must be prepared for even more deflationary actions by the end of this year.

The words may seem a little conspired, but nonetheless they have been truly constructed out of the dotty forecasts of Federal Open Market Committee (FOMC). The US central banking system recently published a press release in which it discussed the possibilities of spiking interest rates sometime this year if, by any chance, they see any further improvements in the labor market and the inflation corrects itself to around 2% over the medium term.

us federal reserve bitcoin

In addition to this, the proposed hike, if comes into effect, is likely to improve exports, a sector that seemed to have weakened enough due to the zero interest rate scenario. But as many experts believe, the hike will be very modest initially but will pick up by the time the total of eight FOMC meetings have been conducted.

The Dollar Will Strengthen

One thing that is definitely going to happen post interest rate hike is farewell to a cheap dollar. High interest rates will attract more foreign investors to yield better returns from their forex investments, causing more demand of the USD. Conversely, a spiked dollar value will also influence Americans to buy foreign products and further to invest in foreign companies.

And as we can notice with the multiple currency charts against the USD, the greenback seems to have regaining its grounds after all. According to the analysis published at FXStreet, the dollar’s value has surged notably in the wake of the FOMC’s announcement, despite the released of a “weaker than expected” economic data. The data however was immediately recorded (the values might have corrected by the time you are reading this article).

Bitcoin Will Be a Dramatic Treat

It would be fun to see how a newer trading instrument such as Bitcoin would react to the gradual unwinding of the US market. A stronger dollar would indeed overshadow Bitcoin, especially in times when the cryptocurrency’s value has already been wrecked enough. However, another aspect of this theory depends on the demand of Bitcoin that is also expected to surge this year, thanks to the recent promising mainstream inclusions  (read here).

In the next few months, the Bitcoin community will have to come ahead of its comfort zone to attract both forex and stock investors. There could really be a mood shift that could impact global markets and US companies’ stocks due to a strong USD. If Bitcoin manages to prove itself as an alternative, we might say it will be able to find a stable consolidation. Otherwise, we know how it falls against the dollar — scarily.

  • Adam Smith

    Anyone that thinks the Fed can start to increase rates doesn’t have a firm grasp of the economics of the situation. I’ll make two straight forward predictions. One, the Fed will not increase rates in 2015. Two, by early 2016, the Fed will have begun QE4.

    It’s honestly disappointing that an author involved in the topic of Bitcoin would think there’s any possibility of a rate increase in 2015. Even more, to go on to say that the other major central banks would then have to follow with rate increases shows a real lack of economic understanding. Also, the Fed won’t entertain a strong dollar. It’s bad for the current domestic economy and is already set to be too strong without any rate hike.

    • Neal Palmquist

      Everybody says that a stronger dollar will hurt the price of bitcoin but I don’t agree. I think when the dollar is weak, then bitcoin is less attractive than when the dollar is strong. I believe that poorly informed Americans who hold the world reserve currency are the ones who support the price of bitcoin. If we don’t watch out, the taxpayers will also be hijacked to support bitcoin prices with government spending. When the dollar gains strength, it is possible that it will cost Americans even more of those even stronger USD to buy a bitcoin because the global demand for USD that a bitcoin holds will grow.

      But right now bitcoin is falling into a position where an infinite number and variety of altcoins will soon move in and eat bitcoin’s whole and entire lunch. Only one infinitely divisible bitcoin was ever needed to be created. The limit was always just one bitcoin. Mining to create new ones does not approach the limit. Rather, it departs from the limit as it effectively fractures the very first bitcoin into tiny pieces so that your cookies can be taken from the jar for the entire duration of the time you hold bitcoin.

      • Adam Smith

        I don’t think I brought these points up in my original comment, but I’ll address them. Regarding your first point, yes, there are many more factors affecting the dollar denominated price of bitcoin than just the strength of the dollar. However, all else being constant, a stronger dollar would be able to buy more bitcoin. Would a stronger dollar be likely to have a significant effect on Bitcoin? Probably not.

        Your second point is a logical fallacy. Yes, bitcoins are in theory infinitely divisible, but that has nothing to do with the economic concept of mining. Under the current network rules, there will be a max of 2.1 quadrillion satoshis created. So yes, one coin breakable into 2.1 quadrillion subunits would be absolutely identical to the current system. However, that still has nothing to do with mining, and the Bitcoin network requires mining for a variety of very valid reasons.

        Bitcoin was, brilliantly, designed to start off being highly inflationary, with inflation decreasing at regular intervals until Bitcoin becomes deflationary. I would suggest trying to launch an immediately deflationary altcoin and see how that works out. My guess is that it wouldn’t work very well, and you only have to look at the plethora of failed and stalled altcoins that quickly became deflationary to get an idea of why.

  • inpips

    Spiking interest rates? what to 1% then back down pronto!! The best Bitcoin can do is either consolidate or collapse??

    This article is written by a loon, good luck with the tip button LMAO

  • I think something with the market-cap of two Zynga’s isn’t going to be extremely correlated to macro-variables.

    The biggest correlation to be found with BTC is silver, which has a similar audience and market cap (still double bitcoin at the moment, measured in reserves).

    While silver is cross-correlated with consumable commodity metals like copper, which are themselves correlated to expanding money supply going to work in the real economy, we may see a flight to quality in money entering the cryptocurrency ecosystem in the same way that gold does “less bad” in a major deflationary suck, and then outperforms in the resulting monetary uncertainty (or at least, it did until 2011).

    The late-fiat system can’t really tolerate higher rates – but then again Volker jacked rates up so retail mortgages were close to 30% at the end of the 1970s and it ushered in a golden age of low inflation relative to asset inflation for 20 years. We don’t really know and neither does Grandma Janet – but she seems like a nice person. We’ll see what prospectively arbitrary but heavily considered fiddling these small-numbered central planners perform, and the reactions, and in any case a new infrastructure for a parallel financial system is going to see a bull market because that’s what the world needs.

    • Neal Palmquist

      Not sure i can follow everything you said but I very much appreciate reading a comparison of BTC to silver instead of the nonsense that is more common where people compare it to gold.

    • Wolfman Jack

      Agreed, the bitcoin reward halving next year will have more of an impact on price then if the dollar goes up or down by a few percentage points. I think bitcoin will probably behave more like a tech stock until its growth levels out then maybe it will be more like a commodity. I wouldn’t be surprised if the Fed raises interest rates this year though especially if the unemployment rate hits 5%. We will just have to see though.

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