Investors in Bitcoin, Ripple, Ethereum, and other major cryptocurrencies should closely watch the Federal Reserve to get a sense of how fast and how far U.S. interest rates will climb. For an obvious reason: higher interest rates could deflate the price of these assets, as they did back in early 2000 with dot.com stocks.
Bitcoin Ripple, Ripple, Ethereum, and other cryptocurrencies have turned scores of investors who placed their bets into these investments into millionaires. But cryptocurrency investors can lose their millions faster than they made them, and then some, if the market momentum turns in the wrong direction.
That’s what is usually the case for investors who make decisions based on emotions rather than intelligence—including Sir Isaac Newton, who lost a small fortune in the South Sea Bubble.
To be fair, it isn’t known whether an asset is in a bubble territory — until the bubble bursts and investors lose a great deal of money.
Meanwhile, some cryptocurrency experts believe that the Fed’s policies won’t have a big impact on cryptocurrency prices. Shidan Gouran, President and COO of Global Blockchain, is one of them.
“Higher interest rates won’t crush Bitcoin, but they will certainly have an effect on it,” says Gouran. “This is the case for two reasons. The first reason is the slightly more obvious one; low interest rates have made traditional investment vehicles less attractive. This is exactly what made ‘alternative’ investment methods such as Bitcoin appealing in the first place. Higher interest rates will alleviate this disadvantage for traditional forms of investment, which does stand to displace some investment in Bitcoin. The second reason has to do with a side effect of Bitcoin’s popularity. As Bitcoin’s value began to spike in December, people started taking out second mortgages on their homes to fund Bitcoin purchases. A rise in interest rates will likely cause a lot of panic selling, because the second mortgages (which have higher rates than first mortgages) will soon become too expensive to service, and investors will likely seek to recover their capital by selling their Bitcoin, even at a loss.”
Darren Marble, CEO of CrowdfundX, agrees with Gouran that higher interest rates won’t have a big impact on the price of cryptocurrencies. He worries more about the uncertainty surrounding cryptocurrency regulations than he does about the prospect of rising interest rates.
“I do not believe higher interest rates will crush Bitcoin anytime soon,” says Marble.“The Fed is raising interest rates. But it’s doing so cautiously. As we have seen over the past couple months, uncertainty around regulation has been a much bigger factor in the price depreciation of Bitcoin than interest rates might have.”
Meanwhile, David Drake, CEO of LDJ Capital, sees Bitcoin and other cryptocurrencies as “a hedge against increasing interest rates as a new investment asset.” But he warns investors not to place a big portion of their savings in the digital currency.