What Is the Correlation Between Interest Rates and Crypto?
Interest rates don't just shape the economy—they shape your investments. Whether you're trading stocks, buying crypto, or securing a loan, central bank decisions can make or break market momentum. With inflation concerns, shifting Federal Reserve (Fed) policies, and an evolving investment landscape, understanding these moves is more important than ever, especially given the growing correlation between interest rates and crypto.
In this article, we'll break down how interest rates impact financial markets, from traditional assets to Bitcoin and crypto. Plus, we'll examine past trends and what they could mean for the future.
What Are Central Bank Interest Rates?
Think of central bank interest rates as the "price of money" that big banks pay when they borrow from the government's bank (like the Federal Reserve in the US). This rate acts like a master switch that affects all other interest rates in the economy - from your mortgage to business loans.
When the central bank changes this rate, it's like adjusting the economy's speed dial. Lower rates make money cheaper to borrow, encouraging people and businesses to spend and invest more, which speeds up the economy. Higher rates make borrowing more expensive, which slows things down.
Central banks use this tool to keep the economy balanced - preventing it from overheating (causing inflation) or stalling out (causing recession). They watch key signs like how fast prices are rising, how many people have jobs, and how fast the economy is growing, then adjust rates accordingly.
These decisions ripple through financial markets because they change how much cash is flowing around and how willing investors are to take risks with their money.
Interest Rates and Crypto: How Do Central Bank Decisions Impact Crypto Assets?
Since crypto is considered a high-risk asset, rate hikes and cuts by the Fed and other major central banks can have a significant impact on crypto asset prices. While many view Bitcoin as a safe-haven asset, the growing presence of institutional investors has increased its correlation with traditional financial instruments. In fact, nearly 14% of the total BTC supply is held by institutions, corporations, and governments as of March 5, 2025.
Thus, it's clear that interest rates and crypto are increasingly interconnected.
When the Fed or another central bank raises the benchmark rate, borrowing becomes more expensive, and investors often shift toward high-yield, low-risk assets like bonds instead of speculative investments like cryptocurrencies. Moreover, the higher cost of credit makes capital more expensive for both investors and startups, leading to lower valuations and fewer venture capital (VC) deals in the crypto market.
Conversely, cutting the benchmark rate stimulates the economy by lowering borrowing costs and bond yields. In this environment, investors' risk appetite grows, leading them to allocate more capital to stocks, crypto, and other high-risk assets. A Fed rate cut could also weaken the USD, making sound store-of-value assets like Bitcoin and gold more attractive.
How Did Historical Fed Rate Cuts and Hikes Affect Bitcoin?
Now, let's examine how the Fed's major monetary policy changes have impacted Bitcoin over the past five years:
1.25% cut to 0-0.25% between March 3 and March 16, 2020: To stimulate the economy during the early stages of the COVID-19 pandemic, the Fed slashed rates by 1.25%. BTC's price initially dropped 43.5% between March 3 and March 17 due to market panic. However, the cryptocurrency quickly rebounded, closing the year with a 300% ROI.
2% hike to 4.25-4.50% between September 21 and December 14, 2022: As the Fed aggressively raised interest rates to combat inflation in late 2022, Bitcoin suffered, falling over 25% between September 13 and December 31.
1% hike to 5.25-5.50% between February 1 and July 26, 2023: Despite this rate hike, Bitcoin recovered its 2022 losses, surging 76% between January 1 and August 1. This was the final hike of the Fed's tightening cycle, which investors saw as a turning point. Combined with anticipation surrounding the next Bitcoin halving in April 2024, BTC closed 2023 with a 155% yearly ROI.
1% cut to 4.25-4.50% between September 18 and December 18, 2024: The Fed's first rate cut in over two years, combined with optimism surrounding a potential pro-crypto policy shift following Donald Trump's November election victory, further fueled Bitcoin's bull run. BTC surged 57% between September 1 and December 31, 2024.
Bitcoin has historically reacted to Fed rate adjustments with significant price fluctuations. Rate cuts, such as in 2020 and 2024, fueled bullish momentum, while hikes, particularly in 2022, led to short-term declines. However, Bitcoin's ability to recover, even amid tightening cycles, highlights its evolving market resilience and shifting investor sentiment.
Future Outlook: Interest Rates and Crypto
Investors closely monitor anticipated interest rate decisions, adjusting their portfolios based on central bank signals. When rate hikes are expected, many shift toward lower-risk assets like bonds, while expectations of cuts tend to drive inflows into equities and cryptocurrencies. Market sentiment plays a crucial role, as even the hint of a dovish Fed stance can trigger bullish momentum in crypto and other high-risk asset classes.
The Fed is expected to cut interest rates in 2025, potentially bringing them down to around 4% by year-end. However, the timing and number of cuts remain uncertain, with projections ranging from one to two reductions. Economic growth, inflation, and policy shifts will play key roles in shaping these decisions.
If rate cuts materialise, increased liquidity and risk appetite could drive renewed interest in crypto, potentially fuelling a market rally. However, uncertainty around the Fed's timing may keep volatility high, with investors reacting swiftly to policy shifts. As interest rates and crypto remain increasingly intertwined, traders must stay alert to macroeconomic trends and central bank policies to navigate the market effectively.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
