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Today decides the fate of the crypto market — will it fall or go to the moon after the Fed says the rate?

Andrew Zhoao

News editor

Feb 1, 2023 at 05:07

DCME Group, one of the world’s largest marketplaces for financial instruments such as futures contracts or options, predicts the Fed will raise the federal rate by 25% today. The corresponding probability is 99,9%. How this will affect the cryptocurrency market and what analysts say below.

What does it mean when the rate goes up and down?

The Federal Open Market Committee (FOMC) meets eight times a year. Each meeting lasts two days, at the end of which the agency announces its decision. The current meeting will end on February 1 at 2 p.m. EST.

According to the CME Group, Fed Chairman Jerome Powell and the other FOMC members will raise the benchmark rate by 25 basis points, or 0,25%, from 4,5% to 4,75%. The probability that the rate will remain at the current level is only 0.1%.

Target rate probabilities for 1 Feb 2023 Fed metting
Target rate probabilities for 1 Feb 2023 Fed metting

The federal funds rate is the interest rate at which U.S. banks lend their excess reserves to other banks. 

The rate affects the money market because it determines the cost of borrowed money. When it goes down, the demand for credit from the federal reserve increases, banks get additional liquidity, and they can lower their own rates to lend to companies and individuals.

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Changes in the rate affect the entire financial system, including Bitcoin, which in turn affects altcoins. Historically, the rate has had the opposite effect on digital assets: i.e., if the Fed’s rate goes down, cryptocurrencies go up, and vice versa.

The last meeting was in the middle of December 2022. After that, on December 14, the Fed chairman announced a rate hike to 4,5%, and the market responded with a plunge. For example, Bitcoin fell 9,76% in a few days, from $18,244 to $16,480, and Ethereum fell 11,52%, from $1320 to $1168.

BTC and ETH falling
BTC and ETH falling

In contrast, when the Fed lowers the rate, the regulator begins to buy assets on the open market and fill up its own balance. The lending rate decreases, and the investment climate improves. This motivates investors to buy high-risk (due to high volatility) assets again, which include Bitcoin and other cryptocurrencies. 

The Fed has never lowered the rate during 2022. The reason is that the Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of economic expansion.

How will it affect cryptocurrency now? Analysts opinion

What will happen to the market after the decision is announced will be seen soon, but there is little to no prediction that the Fed will cut the rate. Here’s what Crypto Twitter thinks about it.

Bitcoin ended January with growth. The first cryptocurrency rose 28.3% over the month, from $16,547 to $23,078. Crypto trader Ash WSB believes that if the FOMC raises the rate by 25% and pauses or slows the rate hike from then on, it will be good news for Bitcoin despite the rate hike, and it could rise to $25.4K or higher.

Crypto expert Thomas Kralow believes that the Fed, on the contrary, will reduce the rate, which will provoke market volatility.

However, the market is likely to expect volatility as it is. Analyst and Bitcoin advocate Duo Nine predicts a 0,25% rate hike to 4,75%, after which the market is expected to shake out.

On January 28, trader Mike published a post in which he predicted that before the Fed announcement, Bitcoin will move in a sideways trend. However, in his opinion, after that, if the rate will rise by 0,25%, the cryptocurrency will grow, if it rises by 0,5%, the market will fall.

According to a CoinGecko poll, most Twitter users think the rate will still go up, and by 0,25%. What do you think?

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