BlackRock Predicts Future Rate Hikes by the US Federal Reserve Could Impact Digital Assets

The world’s largest asset manager, BlackRock, has announced that it believes the US Federal Reserve will continue with its campaign of future rate hikes, despite market expectations of a freeze. Experts predict this could mean a volatile road lies ahead for digital assets in the short-term, based on prior performances throughout 2021 and 2022 and present-day announcements from the central bank.

Bitcoin Benefiting From Uncertainty

Bitcoin (BTC) has managed to climb a wall of worry in the wake of the Fed’s aggressive rate hikes, benefitting from uncertainty in the banking sector as investors sought to hedge via a flight to quality.

Immediate Headwinds are not the Biggest

The biggest headwinds now facing the US and global economy are not immediate, Dmitry Lapidus, of crypto-native investment fund Dragonfly, told Blockworks. The Fed “did a great job bailing the banks out,” and the effect on GDP is likely to be exaggerated for the remainder of the year, he said. “I think they cluster somewhere around Q3/Q4 when excess savings are drawn down and housing data is likely to accelerate to the downside.”

Market Uncertainty Still Lingers

Despite the Fed’s recent dovish stance of easing rate hikes, as evidenced by its 25 basis point rise instead of the previously anticipated 50, market uncertainty still lingers.

Lapidus said for crypto, “it’s tough to decouple” from the macroeconomic environment, with the “pain trade” continuing to be up in all risk assets as long as liquidity was supported. In the near term, he predicts the trend of higher prices for digital assets to continue.

Future Rate Hikes?

The Federal Reserve will next convene to determine short-term interest rates on May 3, with analysts predicting a split chance between a 25 bps increase or the decision to maintain current rates, data from CME Group’s FedWatch tool shows.

BlackRock believes the central bank will avoid rate cuts this year and opt to continue curbing inflation, albeit at a less aggressive pace than the year prior. Lapidus agrees, pointing to “stubborn” and “sticky” core inflation, as well as the contained banking crisis. In that world, rates would continue to rise.

Impact on Digital Assets

Previous hikes show the impact on digital assets has had mixed results, particularly at a time when the industry was dealing with several major bankruptcies and declining valuations.

The two largest drops in bitcoin’s price on rate hike announcements occurred on May 5, 2022 (-7.9%) and June 16 of the same year (-9.6%), taking the federal funds rate from 1.5% to 1.75%. Both came before the larger interest rate hikes of 75 bps in the latter half of 2022.

If the Fed reaccelerates its pace with indications of significantly more rate hikes to come, then the crypto rally will falter, Markus Thielen, Matrixport’s head of research, told Blockworks. “The debate about a higher terminal rate would also have negative implications for tech companies and startups,” he said.

Change of Pace

Still, the environment in which digital assets now operate has significantly changed from two years ago when rates had come off historic lows which sustained a decade of cheap borrowing costs.

The price of bitcoin actually rose about 8% on a rate hike of 75 bps on July 27, 2022. Other instances, including the hikes on Dec. 14, Feb. 1, 2023, and, most recently, on March 22, resulted in moderate increases in bitcoin’s price.

Conclusion

In conclusion, the future of digital assets in the face of potential rate hikes remains uncertain. While previous rate hikes have had mixed effects on digital asset prices, experts warn that a more aggressive pace of rate hikes could lead to a crypto rally falter. However, the current macroeconomic environment is different from that of two years ago, and the impact of high-interest rates on digital assets over the long term remains unknown.

As always, investors should exercise caution and carefully consider their risk tolerance when making investment decisions, especially in the volatile world of cryptocurrencies.

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