What are Interest Rates And How Do They Affect The Crypto Markets

What are Interest Rates

Interest rates represent the cost of borrowing money or the return on savings over time. Central banks, such as the U.S. Federal Reserve (Fed), set benchmark interest rates that influence borrowing costs for individuals, businesses, and financial institutions. In the U.S., the federal funds rate serves as the primary benchmark, determining the short-term interest rates banks charge each other for overnight loans.

When central banks adjust interest rates, their goal is to either stimulate economic growth or control inflation. Lower interest rates encourage borrowing and spending, fueling economic activity, while higher rates make borrowing more expensive, slowing growth to keep inflation in check.

Interest rate fluctuations have broad implications across financial markets, affecting stock prices, bond yields, real estate, and currency valuations. As the crypto market becomes more integrated with traditional finance, these changes have increasingly shaped investor sentiment and market behavior in the digital asset space.

Will Crypto Go Down if Interest Rates Rise?

Higher interest rates generally have a negative impact on riskier assets, including cryptocurrencies, due to several key factors:

1. Tighter Liquidity and Risk Aversion: Rising interest rates make borrowing more expensive, reducing the availability of cheap capital that has fueled speculative investments in cryptocurrencies. When money becomes more expensive to borrow, investors tend to shift towards lower-risk assets like bonds, which offer higher returns in a rising-rate environment.

2. Stronger U.S. Dollar and Economic Uncertainty: Higher interest rates often lead to a stronger U.S. dollar, making it more expensive for global investors to buy Bitcoin and other cryptocurrencies. Since BTC is primarily priced in USD, a stronger dollar can put downward pressure on crypto prices, limiting upside momentum.

3. Declining Appetite for Growth and Tech Assets: Cryptocurrencies are frequently compared to high-growth tech stocks, which historically underperform in a rising-rate environment. When rates climb, investors prioritize assets with stable cash flows and dividends, making speculative investments—such as crypto—less attractive.

An example would be in 2022, when the Fed aggressively raised rates to combat inflation, increasing the federal funds rate from near 0% to over 4.5% by year-end. This triggered a severe downturn across risk assets, with Bitcoin falling from around $48,000 in March to below $16,000 by November—a decline fueled by tighter liquidity, a stronger dollar, and investor risk aversion.

Do Lower Interest Rates Help the Crypto Markets

Conversely, lower interest rates tend to have a positive impact on risk assets, including cryptocurrencies. Here’s why:

1. Increased Liquidity and Risk Appetite: When interest rates are low, borrowing becomes cheaper, and investors have more disposable income to allocate toward speculative assets. This fuels capital inflows into the crypto market, driving up prices.

2. Weaker U.S. Dollar and Inflation Hedge Narrative: Lower interest rates typically weaken the U.S. dollar, making Bitcoin (BTC) and other cryptocurrencies more attractive as alternative stores of value. During periods of loose monetary policy, investors turn to Bitcoin as a hedge against potential currency devaluation.

3. Higher Investment in Innovation and Growth: The crypto industry thrives on innovation, and lower interest rates support venture capital funding for blockchain startups, DeFi protocols, and Web3 projects. With easier access to capital, the industry sees accelerated development and adoption, creating bullish momentum for crypto prices.

For example, following the COVID-19 pandemic in 2020, the Fed slashed interest rates to near-zero and implemented aggressive quantitative easing to support the economy. This flood of liquidity fueled an unprecedented crypto rally, with Bitcoin surging from $6,000 in March 2020 to an all-time high of $69,000 by November 2021—one of the strongest bull runs in crypto history.

Historical Examples of Interest Rates Impact on the Crypto Markets

1. 2022: The Aggressive Rate Hikes and Crypto Bear Market

Interest Rate Environment 

In response to surging inflation, the U.S. Fed adopted one of the most aggressive monetary tightening cycles in recent history. Starting in March 2022, the Fed raised the federal funds rate from near zero (0.25%) to over 4.5% by the end of the year. The goal was to curb inflation, which had reached a 40-year high, by making borrowing more expensive and reducing excessive liquidity in the financial system.

The rapid succession of rate hikes, combined with the Fed’s quantitative tightening (QT) policy—where it reduced its balance sheet by selling off assets—led to a sharp contraction in market liquidity. As risk appetite dwindled, speculative assets like cryptocurrencies, which had thrived in the low-interest-rate environment of 2020-2021, faced significant pressure.

Crypto Market Reaction 

Bitcoin (BTC), which had been trading at around $48,000 in March 2022, saw a steady decline throughout the year, eventually plunging below $16,000 by November. This represented a more than 65% drop from its peak and marked one of the steepest corrections in Bitcoin’s history.

The selloff was not limited to Bitcoin. The entire crypto market experienced a major downturn, with Ethereum (ETH) and other major altcoins suffering similar declines. The total crypto market capitalization shrank from nearly $3 trillion at the end of 2021 to below $800 billion by late 2022.

2. 2020–2021: The Zero-Rate Bull Market

Interest Rate Environment 

In response to the economic shock caused by the COVID-19 pandemic, the U.S. Fed implemented an emergency monetary policy aimed at stabilizing financial markets and stimulating economic growth. The Fed aggressively cut interest rates to near zero (0.25%) in March 2020. It launched an unprecedented round of quantitative easing (QE), injecting trillions of dollars into the economy through bond purchases and stimulus programs.

This era of easy money and abundant liquidity led to a surge in risk appetite across financial markets. Investors, flush with cash and facing historically low yields in traditional assets like bonds, sought higher returns in alternative markets—including cryptocurrencies.

Crypto Market Reaction 

The low-interest-rate environment helped ignite one of the most explosive bull markets in crypto history, with Bitcoin leading the charge. After crashing to $3,800 in March 2020 during the initial market panic, BTC quickly rebounded and began a parabolic rise. By November 2021, it had reached an all-time high of $69,000, representing a nearly 1,700% increase from its pandemic low.

Ethereum (ETH) and other major altcoins followed suit, with ETH rising from $100 to over $4,800, fueled by the growing adoption of decentralized finance (DeFi) and non-fungible tokens (NFTs). The total cryptocurrency market capitalization soared past $3 trillion, an all-time high.

3. 2017–2018: The Bitcoin Boom and Fed Tightening

Interest Rate Environment 

Between 2016 and 2018, the U.S. Fed embarked on a gradual tightening cycle, raising the federal funds rate from 0.5% to 2.5%. This marked the first series of rate hikes since the 2008 financial crisis. The decision was driven by steady economic growth, declining unemployment, and rising inflationary pressures.

• December 2015: The Fed initiated its first post-crisis rate hike, increasing the federal funds rate from 0.25% to 0.5% after nearly a decade of near-zero interest rates.

• 2016-2018: The Fed raised rates seven times, with the benchmark rate reaching 2.5% by December 2018.

• Balance Sheet Reduction: In addition to rate hikes, the Fed began unwinding its balance sheet, reducing liquidity in financial markets.

The tightening cycle signaled a shift away from the ultra-loose monetary policies that had fueled asset price growth across markets, including cryptocurrencies.

Crypto Market Reaction 

Despite the rising interest rate environment, Bitcoin surged to $20,000 in December 2017, driven by a combination of speculation, mainstream media attention, and a surge in initial coin offerings (ICOs). However, by 2018, as liquidity tightened and the speculative bubble deflated, Bitcoin entered a prolonged bear market, dropping below $4,000 by the end of the year.

4. 2013–2015: The Early Crypto Market and Rate Stability

Interest Rate Environment 

Following the 2008 financial crisis, the U.S. Fed implemented unprecedented monetary easing to stabilize the economy. Interest rates were slashed to near-zero levels to encourage borrowing and economic recovery.

• December 2008: The Fed cut the federal funds rate to 0.0% - 0.25%, marking the beginning of an era of ultra-loose monetary policy.

• Quantitative Easing (QE): The Fed launched multiple rounds of asset purchases to inject liquidity into financial markets.

• 2010-2015: Interest rates remained at record lows, with the Fed signaling no immediate plans to tighten policy due to slow economic recovery and low inflation.

This prolonged low-interest-rate environment provided a strong foundation for risk assets to thrive, including stocks, real estate, and emerging asset classes like Bitcoin.

Crypto Market Reaction 

Bitcoin was launched in January 2009, in the aftermath of the financial crisis. Initially, it gained traction within niche tech and cryptography communities. However, as awareness grew, BTC experienced its first major bull run, surging to over $1,000 in late 2013, before crashing to around $200 by early 2015.

Make Use of Flipster’s Economic Events Feature to Stay Informed of Interest Rate Changes

Flipster users can stay ahead of key macroeconomic events, including Federal Open Market Committee (FOMC) meetings, where interest rate decisions are announced, through Flipster’s Economic Events feature. This tool delivers real-time updates on major financial events, such as central bank decisions, economic data releases, and policy shifts that influence crypto markets. By tracking critical indicators like interest rate adjustments, GDP growth, employment reports, and inflation metrics (CPI & PPI), traders can better anticipate market volatility and adjust their strategies accordingly.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.