Key facts: The US Federal Reserve keeps the interest rate high to lower inflation. If the interest rate is high, investors prefer Treasury bonds instead of BTC. Monetary policies implemented by government agencies or central banks can impact both traditional financial assets and bitcoin (BTC) and cryptocurrencies. These measures, which include changes in interest rates, seek to control inflation or encourage economic growth. Given the weight of the United States in global finance, almost every move by the Federal Reserve (Fed) has a significant impact on markets around the world. As BitcoinDynamic has already reported, the price of the digital currency created by Satoshi Nakamoto has reacted to rising and falling interest rates. It happens that if there are high rates, investors and companies prefer Treasury bonds to protect their savings. At a lower rate, meanwhile, they tend to look for more profitability in more volatile markets such as stocks and BTC. However, according to the report of the analytical company Coinshares, as of 2023 bitcoin increased its independence from interest rates. In this regard, the firm explained:
“The relationship between bitcoin and interest rates is generally inverse: when rates fall, bitcoin tends to rise, and vice versa. This pattern appears to have broken down in 2023, although other catalysts have fueled the latest bull market.” Coinshares, an asset management and analytics firm.
An example that illustrates this relationship is what happened from late 2016 to mid-2019. At that time, the Fed decided to raise rates and the price of BTC fell from $16,000 in 2017 to $3,500 in early 2019. During the COVID-19 pandemic, the US agency kept the rate between 0 and 0.25% until mid-2022. During that period, more precisely in November 2021, the digital currency hit an all-time high (ATH) of $68,789. When rates rose to 5.5% in 2022, their highest level since 2007, BTC moved in the opposite direction again and fell to $16,500.
These movements in the relationship between the BTC price and the interest rate can be observed in the following graph.
Chart comparing interest rate movements and how it affected the price of BTC. Source: Coinshares. For Coinshares, meanwhile, “the bull market that began in the fall of 2023 may appear to have gone against the grain of the trend, given that rates have remained elevated, but other catalysts have arguably supplanted macroeconomic forces, specifically the launch of spot bitcoin ETFs and the latest halving.” Since its launch in January 2024, exchange-traded funds (ETF) cash-based investments accumulated more than $16 billion in net inflowsaccording to data from SosoValue.
Money inflows and outflows in the 11 Bitcoin ETFs. Source: TradingView. Capital inflows in these instruments generate a favorable scenario in the BTC price. This occurs because the issuing companies must buy and hold this asset to support their actions. This dynamic creates a scenario for an eventual increase in its price. The growing demand, coupled with the scarcity of BTC, generates an upward pressure on its price in the long term.
In addition, there are other factors that are also generating bullish perspectives in the market such as the electoral contest that For now, the protagonists are the current president Joe Biden and the candidate for the Republican Party, Donald Trump.. In his campaign to return to the White House he defined himself as a “crypto president” and promised end the persecution against the industry. He also harshly criticized the head of the Securities and Exchange Commission (SEC), Gary Gensler. “He is against it, the Democrats are very much against it. But I am fine with cryptocurrencies. And if you are in favor of them, you better vote for Trump,” he said. On Saturday, June 13, the former candidate was the victim of an assassination attempt, which increased support among the population. This event had a positive reaction in the market that took the price from $57,000 to $63,000.