Bitcoin and Ethereum Follow Stock Market Upward After Fed Interest Rate Increase
May 4, 2022
Interest rates are going up half a percentage point. But the cryptocurrency and stock markets are headed up by a lot more.
The cryptocurrency market cap gained nearly 6% in 24 hours, with the top two coins—Bitcoin and Ethereum—both around that figure. The biggest gainer in the top 10 was Cardano’s ADA, which tallied a 13% increase. BNB, XRP, Solana, and Luna all recorded gains of at least 5%.
The upward adjustment maps well to the returns on stocks 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 both crypto and equities—is the Federal Reserve’s decision today to raise interest rates by half a percentage point, which is the biggest increase since 2000.
When the Fed raises interest rates, it increases the cost for financial institutions to borrow, which has a domino effect all the way down to main street consumers’ credit card rates. The overall idea is to slow down or reverse the level of inflation (which ticked up this year) by making money more expensive to come by.
If that’s the case, why is the stock market having a banner day? And crypto along with it?
The quick answer is because many investors thought the interest rate hike, though larger, would be even larger. The Wall Street Journalquotes economist Alison Boxer as saying, “The main news from the press conference was that [Fed Chair] Powell pushed back on the 75 basis point hikes that markets had started to price in.”
Moreover, while the Fed is prepared to raise rates further in the coming months, Powell indicated that a future 0.75 percentage point increase probably wouldn’t be in the cards.
Bitcoin was once thought of as a digital alternative to gold, in that it is an inflation-resistant store of value. But recently it’s been taking its cues 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. (Correlation runs on a scale of -1 to 1, with the former meaning assets’ 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 although crypto is up today, it’s more or less flat over the last seven days at a market cap of $1.8 trillion. And like tech stocks that have been getting hammered this year, the overall market cap—which began the year at $2.2 trillion—is down by double-digit percentages.
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