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The inflation rate in the United States currently sits at a 40-year high. The Federal Reserve had announced plans that could be taken to ensure the rate is lowered so that the spending power of the US dollar can be restored.
One of the recommendations provided by this institution is raising the interest rates. However, such a move has created anxiety in the cryptocurrency space, with many believing that it could affect Bitcoin prices as the coin has been deemed a hedge against inflation.
Federal Reserve to raise interest rates
The cryptocurrency market has failed to make any substantial gains this year. One of the reasons attributed to this poor performance is that traders remain cautious due to the possibility of increased interest rates.
A report from Santiment evaluated the extent to which the crypto space and the equity market could be affected by any changes in the interest rates. The report showed that the crypto market volatility was expected to increase if the interest rates increased.
“This week will be big for #crypto and #equities traders, as the #Fed is expected to decide on a quarter-point rate hike this week. #Bitcoin & #Ethereum have been pegged to the #SP500 in 2022, and these decisions should impact #cryptocurrencies greatly,” the Santiment report added.
The US Federal Reserve had earlier announced that a rise in the interest rates would be expected in March. The crypto and stock markets reacted to this announcement, given that an increase in the interest rates could deter investments and slow down economic growth.
When the interest rate is increased, investors tend to pull their funds away from risky investments and choose bank deposits and yields. Increased interest rates could also affect the prices of stocks related to IT, biotech and other related secto0rs that recorded significant growth last year.
The Federal Reserve could also choose to leave the interest rates as they are. However, this could cause market uncertainty. The interest rates in the US are currently at their highest level in four decades. Therefore, there is a very small chance that the institution will leave the interest rates unaffected.
Crypto as a hedge against inflation
The cryptocurrency sector has gained use as a hedge against inflation. In November, Bitcoin reached an all-time high of $69,000 after it was believed that it had gained a strong use case as an inflation hedge. At the time, the level of inflation in the US was at a 30-year high.
Bitcoin has also received the term “digital gold”, with investors believing that it could have the same functionality as Bitcoin in being a store of value. However, it is yet to gain the level of global adoption that gold has as the world’s preferred reserve asset.
The volatility of Bitcoin’s price has made it a less preferred asset compared to the equity market. However, after making major gains in 2021, Bitcoin’s level of adoption has grown significantly in both the retail and institutional sectors.
If both retailers and institutions turn towards Bitcoin to hedge against inflation, this could help the price gain in both the short and long terms. If the Federal Reserve chooses to maintain the interest rates as they are, the price gain could be tremendous, and the price of Bitcoin could rally to a new all-time high.
Despite the factors surrounding the level of interest rates, there is also the ongoing crisis between Russia and Ukraine, which has spooked the financial markets. Therefore, the developments in the situation between the two countries could also play a role in the direction that Bitcoin’s price will take.