Gairika Mitra
Speculation in the crypto space has emerged following Federal Reserve Chairman Jerome Powell’s recent statement regarding a probable interest rate cut. He delivered a crucial message to investors during his speech at the Economic Club of Washington, D.C. on Monday.
In his speech, Powell hinted that the Fed might reduce interest rates right before inflation reaches its target of 2% (as decided by the central bank after a breakout surge during the pandemic). But how will the reduction in interest rate affect the crypto space?
Some of the reasons could be related to various factors like increased liquidity, hedge appeal, market volatility, and dollar valuation. With lower interest rates, there can be an increased liquidity in financial markets. In a lower interest rate environment, there is an uptick in liquidity as borrowing costs decrease, allowing for more capital to be available for investment.
Again, cryptocurrencies like Bitcoin can be a hedge against inflation. JP Morgan noted in 2021 that institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold. Part of the reason is its scarcity as it has a fixed supply of 21 million. Consequently, as the king of crypto rises, other cryptocurrencies will also rise. This could mean that more people would turn to Bitcoin as a store of value.
With sudden shifts in monetary policy, there could also be increased market volatility. Increased rate cuts would also be an indication of the U.S. dollar weakening. Jonathan Petersen, senior markets economist and foreign exchange specialist at Capital Economics, says rising rates indicate a stronger dollar. With falling rates, the dollar could weaken. This could lead to cryptocurrency becoming more attractive, with more people investing in crypto, according to some industry experts.
They shared that as the volatility of the forex market accelerates, Bitcoin becomes a more appealing option for investors seeking safe-haven assets.
Take Bitcoin, for instance, which has recently seen a significant uptick in value. At 7 a.m. EST on Wednesday, it was trading at $65,155.02. One year ago, at approximately the same time, it was priced at $30,147, showcasing a significant growth of around 116% within a year’s time.
Some crypto advocates applauded Powell’s speech and have taken to X to express their enthusiasm. OBI Real Estate, a popular real estate platform, shared that potential Fed rate cuts could lead to increased downloads of crypto wallets.
“Fed Chair (Powell) hints at rate cuts, while crypto wallet downloads reverse into an uptrend. Historically when interest rates lower, real estate transaction volume increases. Also, an influx of active crypto wallets increases the demand for crypto-native applications,” the account tweeted.
In summary, the prospect of a rate cut could rejuvenate the crypto space, fostering greater liquidity and enhancing the appeal of digital assets as a hedge against inflation.
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Gairika holds positions in BTC. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Magazine and The Shib Daily are the official media and publications of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.
