The effects of the FED’s monetary policy on cryptocurrencies
The effects of the FED’s monetary policy on cryptocurrencies
Crypto

The effects of the FED’s monetary policy on cryptocurrencies

By Fabio Lugano - 5 Nov 2018

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On Thursday, November 8th, the FED will set the new interest rate and give guidance on its monetary policy.

The decision will be taken by the Federal Reserve Open Market Committee, the committee that gathers the governors of the regional branches of the FED, which will make the decision based on elements such as inflation and unemployment rates.

The FED applied a rate of 0.25% from 2009 to 2015 to allow the economy to recover after the 2007 crisis.

Fed monetary policy on crypto

The development of Bitcoin and the first cryptocurrencies took place in an environment with rates almost equal to zero.

The significant increase in rates only occurred gradually during 2017.

But could future increases in interest rates damage Bitcoin and other cryptocurrencies?

Robert Leshner, interviewed by Fortune, thinks so: “We’ve always known crypto in an environment of essentially zero or low interest rates. And that’s an environment of easy and loose money where capital has been prolific and looking for returns wherever it was found. We’re finally starting to enter an environment of rising interest rates which crypto has never seen before and it’s going to be potentially challenging to the price of a lot of crypto assets just like it will be for a lot of assets in general, including equities”.

The market values an asset on the basis of its return against a risk-free investment return whose reference is provided by the central bank with the refinancing or discount rate.

The increase in these rates decreases the value of all assets if they do not manage to increase their profitability in line with the increased interest rates.

This trend, according to Leshner, will also mark the success of the stable coins of which he is a promoter through his company Compound.

The rise in interest rates has always been underestimated as an element of influence in the cryptocurrency market, but it could be an element to be taken into account if the trend towards interest growth continues.

Fabio Lugano
Fabio Lugano

Graduated with honors from Bocconi University, Fabio is a consultant for companies and wounded shareholders of the Banche Venete. He is also the author of "Scenari Economici", and lecturer and analyst of cryptocurrencies since 2016.

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