Rising interest rates are generally regarded as bad news for digital assets because of how their appeal diminishes.
Bitcoin has fallen after the Federal Reserve confirmed that it remains likely to increase U.S. interest rates in March.
But at a news conference, Fed chairman Jerome Powell indicated that a lot of uncertainty remains — including how many interest rate hikes will happen in 2022, and how sharply they will rise.
All of this comes as the central bank attempts to bring inflation under control, and some economists fear the cost-of-living crisis could get worse before it gets better.
As a result, the Fed remains determined to turn off the money taps and end the extensive stimulus programs that were introduced at the height of the coronavirus pandemic. Powell said:
"This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic."
It is worth noting that the Fed will have to achieve a balancing act when it comes to raising interest rates. Employment levels could be affected and the current economic recovery could be derailed if they rise too quickly.
Reaction to the announcement has been somewhat universal. BTC is currently trading at $36,821 — down 3.76% on the day and markedly lower than the highs of $38,825 seen in the run-up to his remarks. The stock markets also fell marginally on Thursday. Rabobank analyst Jane Foley told the Reuters news agency:
"What cheap money has done is provide a safety blanket from bad news. But as this comfort blanket is pulled away, investors will be more exposed and I suspect this will create a more volatile environment for asset prices."
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The Impact on Crypto
Rising interest rates are generally regarded as bad news for digital assets because of how their appeal diminishes.
Less cautious investors may choose to rely on government bonds and because they pose less of a risk.
Major cryptocurrencies such as BTC and ETH could also end up suffering if the shift in monetary policy has a lasting negative impact on the stock market.
Analysts such as Mike McGlone believe any impact on these digital assets should be short-lived. The crypto markets have now endured two corrections over the past 12 months, while the S&P 500 and Nasdaq 100 have managed to hold on to most of their gains since the pandemic began.
A big line in the sand for Bitcoin stands at $30,000 — a level that was successfully defended last July — and any fall below this psychologically significant price point could have big ramifications.
