Bitcoin (BTC) experienced a small correction after an increase in interest rates announced by the U.S. Federal Reserve (Fed). The decision to raise interest rates comes after increased fears linked to the banking industry. Let’s not forget that, during the last few weeks, several banks in the United States and Europe have requested help from governments and regulatory agencies.
Central Banks Raise Interest Rates
Interest rates continued to grow as the Federal Reserve increased its key rate by 0.25 percentage points. But the increase in interest rates is generating doubts among investors that see banks in a very weak situation. Despite that, during the announcement, the Fed explained that the banking system is “sound and resilient.” In the United States interest rates have reached their highest point since 2007.
It is also worth taking into consideration that the increase in interest rates in the United States follows the decision taken by the European Central Bank (ECB) to also increase interest rates by 0.5 percentage points last week. The ECB is following a similar path taken by the Fed, but interest rates in the Eurozone have skyrocketed in just a few months.
Inflation rates in some European countries have surged to over 20%. Some Eurozone countries are also experiencing issues with inflation, which has pushed the ECB to increase interest rates even higher in order to stop inflation. This has also affected banks, and some of them are asking central banks to stop the increase in interest rates.
For example, Silicon Valley Bank and Signature Bank, two regional banks from the United States, collapsed a few weeks ago. Just last weekend, UBS decided to take over Credit Suisse with a deal of $3.5 billion. Regulators have been worried that there could be a contagion crisis in the banking sector linked to these recent collapses and growing interest rates.
Due to this reason, there have been efforts by central banks from large economies, including the ECB, the Fed, the Bank of Japan, the Bank of England, and the Bank of Canada to inject liquidity into the market and increase their cooperation to avoid further issues linked to banks.
Despite the current situation in the banking sector, central banks continued to increase interest rates and try to stop inflation. Some countries are not only experiencing high inflation rates but already they are in a situation known as stagflation, which is a stagnating economy with high inflation rates.
Bitcoin Corrects After Fed Announcement
At the time of writing this article, Bitcoin (BTC) is being traded at $27,820, according to data shared by CoinGecko. Bitcoin’s market capitalization is also at $538 billion. It is worth taking into account that in the last 24 hours, Bitcoin fell by 1.5% to its current price.
However, Bitcoin has been in a strong bull market in recent weeks, which pushed Bitcoin price to over $28,000 for a short period of time, registering a 7-day gain of 14%. This shows that there is a growing interest in Bitcoin as interest rates grow and the banking crisis continues to be manifested in banks requesting help from governments and other financial institutions.
As interest rates continue to rise, investors are seeking alternative assets to diversify their portfolios and mitigate risks. Bitcoin and other cryptocurrencies are emerging as one such asset class, with their decentralized and borderless nature providing a hedge against the traditional financial system.
Other alternative assets such as precious metals like gold and silver are also experiencing increased demand as inflation fears mount. Gold prices have surged in recent months, reaching their highest levels since 2011. Real estate, art, and collectables are other alternative assets that investors are turning to in search of higher returns.
One of the main features of Bitcoin is related to its limited supply. This is different from fiat currencies that are printed by central banks. There will be only 21 million Bitcoin in existence and this is something that remains in this way. In 2024, Bitcoin is going to experience a new halving event. That means that the new issuance of Bitcoin is going to decrease by 50% from 6.25 BTC per block to 3.125 BTC per block. This could create larger demand shocks for BTC as there will be fewer new BTC available to meet the demand for new coins.