Big news, delivered! After three years, the Federal Reserve has once again raised rates by 25 basis points. The benchmark interest rate is adjusted to 3.75%-4.00%, and the dot plot releases a signal: it’s likely there will be one more rate hike within this year.
Many friends wonder: when the US raises interest rates, why do the Bitcoin and crypto markets get hit as well? Below, I’ll explain the logic in plain language.
How exactly does a rate hike affect the crypto market?
1. The opportunity cost of holding coins increases
Mainstream cryptocurrencies like Bitcoin and Ethereum do not generate interest on their own.
After the rate hike, US Treasuries and dollar deposits can yield solid risk-free returns. Institutional funds do the math: you can reliably earn interest by holding government bonds—why take risks to rush into a high-volatility crypto market? So some risk capital chooses to withdraw from the crypto market.