Why does crypto go down when interest rates go up?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Today, let’s try and understand the recent events in the stock and crypto markets.

You’ve seen the news: The US Federal Reserve is raising interest rates and suddenly the markets freak out. What does one have to do with the other?

When a governments’ central bank raises interest rates, it means that they will guarantee a certain amount of return on investment to anyone. For you, that means you will soon get more interest for money in your savings account, thanks to the government.

But more money in savings accounts also means that more people will take money out of risky investments, such as stock and crypto, and put it back into savings. The reason is simple: It’s much safer, and will now make them enough to be happy with.

And because those people sell that stock and crypto, it drives prices lower. And suddenly other people get worried and also sell, causing a downward spiral.

So, why on earth would governments want this? Right now, it helps reduce high inflation: People lose some money in their investments, they spend less, prices have to go down. And it gives them another powerful tool: When central banks need to, they can now lower interest rates to induce the opposite effect: Increase stock prices when markets need stimulation.

Now you know why investments have lost value recently. Hang in there and keep learning!

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.