Bitcoin and Ethereum follow stock market higher after Fed interest rate hike

Bitcoin and Ethereum follow stock market higher after Fed interest rate hike

Interest rates increase by half a percentage point. But cryptocurrency and stock markets are driven by much more.

The cryptocurrency market capitalization has gained almost 6% in 24 hours, with the two major coins – Bitcoin and Ethereum – both around this figure. The biggest gainer in the top 10 was Cardano’s ADA, which saw a 13% increase. BNB, XRP, Solana and Luna all saw gains of at least 5%.

The upward adjustment aligns well with stock returns within the Dow Jones Industrial Average and the tech-heavy Nasdaq, which gained 2.8% and 3.2% before the close of trading.

The biggest factor influencing the numbers – for crypto and stocks – is the Federal Reserve decision today to raise interest rates by half a percentage point, the biggest increase since 2000.

When the Fed raises interest rates, it increases the cost of borrowing for financial institutions, which has a domino effect down to high street consumer credit card rates. The general idea is to slow or reverse the level of inflation (which has increased this year) by making money more expensive to find.

If so, why is the stock market having a record day? And crypto with that?

The quick answer is that many investors thought the rise in interest rates, while bigger, would be even bigger. The Wall Street Journal estimate economist Alison Boxer said: “The main news from the press conference was that [Fed Chair] Powell pushed back the 75 basis point increases that markets had started to price in.”

Moreover, while the Fed is ready to raise rates further in the coming months, Powell indicated that a future increase of 0.75 percentage points is unlikely to be on the cards.

Bitcoin was once considered a digital alternative to gold, in that it is an inflation-proof store of value. But recently, he has taken inspiration from the stock market. A report last month from Arcane Research showed the 30-day correlation between BTC and Nasdaq at 0.70, its highest level since July 2020; Bitcoin’s correlation with gold, meanwhile, was -0.45. (The correlation operates on a scale of -1 to 1, with the former meaning asset prices move in completely opposite directions and the latter meaning they move in tandem.)

Bitcoin’s price movement is also highly correlated with the rest of the cryptocurrency market.

But while the crypto is up today, it has been more or less stable over the past seven days at a market cap of $1.8 trillion. And like the tech stocks that have been hammered this year, the overall market capitalization — which started the year at $2.2 trillion — is down double-digit percentages.

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