The price of Bitcoin, Ethereum, and other major cryptocurrencies slumped on Monday as the Federal Reserve is expected to increase its benchmark interest rate by 0.75%, the largest hike in nearly three decades.
At the time of writing, Bitcoin slid to a weekly low of about $21,935, down 2.8% over the past 24 hours, with Ethereum, the market’s second-largest cryptocurrency, shedding nearly 5% for the day to the current value of $1,528.
Among the ten largest crypto assets, Cardano is the heaviest hit with a drop of almost 7% over the day, followed by Solana (-4.35%), Dogecoin (-4.4%), and XRP (-4.15%).
The combined market capitalization of all cryptocurrencies has meanwhile dropped from $1.08 trillion last Wednesday to $1 trillion by press time, according to data provided by CoinMarketCap.
The latest price action comes ahead of the two-day long Federal Reserve meeting kicking off on Tuesday, which is expected to be wrapped up with the U.S. central bank raising interest rates by another 75 basis points.
Fed officials have already upped benchmark short-term borrowing rates by 1.5% this year, including a 75 basis point increase in June—the largest such increase in nearly three decades.
Interest rates and crypto
The move, which the Fed considers its main weapon to curb growing inflation, will see the interest rate—the rate banks charge each other for overnight loans—increase to a target range of 2.25% to 2.50%, meaning that pandemic-era support for the U.S. economy is effectively coming to an end.
When the federal funds rate goes up, this impacts the entire economy: adjustable-rate mortgages, home equity lines of credit, credit cards, student debt, and savings deposits, and other loans are becoming more expensive.
The idea is that less accessible borrowing will dampen consumer demand, thus bringing inflation down.
Interestingly, though, U.S. inflation has actually accelerated since the Fed began raising rates in March—with surging prices for gas, food, and rent catapulting the figure to a fresh four-decade high of 9.1%.
Interest rate hikes could also play out on stocks, cryptocurrencies, and other risky investments, while bringing risks of a decrease in capital inflows and, ultimately, a decline in economic growth.
The expected increase of interest rates in the U.S. also follows a similar move by the European Central Bank last Thursday when the benchmark interest rate in the Eurozone was upped by 0.5%.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.