Sky-high interest rates are exactly what the crypto market needs

We can no longer rely on central banks to prop up our investments, which means learning to look at the health of the companies and products in which we invest.

The United States Federal Reserve Open Market Committee’s September decision on interest rates was entirely expected, with the FOMC holding rates at the current level of 5.25% to 5.5%. As also expected, the committee indicated there may be another rate hike coming this year, with Chairman Jerome Powell insisting — as usual — in his Sept. 20 press conference that the job of getting inflation back to the Fed’s 2% target is in “no way done.”

What was more of a surprise, however, is the fact that the Fed raised its long-term forecast for the Federal Funds Rate, which they now see as standing at 5.1% by the end of 2024 — up from June’s prediction of 4.6% — before falling to 3.9% at the end of 2025, and 2.9% at the end of 2026. These numbers are notably higher than previous forecasts and indicate a “higher for longer” scenario for U.S. interest rates that not too many market participants were expecting.

As such, we saw markets pull back slightly, with the S&P 500 trading down 0.80% shortly after the announcement, followed by the NASDAQ, which fell 1.28% — a big tumble for these headline indexes. Cryptocurrency markets also responded negatively, with Bitcoin (BTC) falling below $27,000 and Ether (ETH) falling nearly 2% to just more than $1,600 shortly after Powell wrapped up his press conference.

Related: How Bitcoin miners can survive a hostile market — and the 2024 halving

Ultimately, the data shows the U.S. economy is returning to a state we haven’t seen since before the financial crisis of 2008-09, one in which economic growth and inflation remain relatively consistent. A U.S. interest rate averaging around 4% over three years would be no surprise in this old world, nor would annual inflation greater than 2%.

The trouble is that investors have become addicted to central banks pumping fast, free money into our economies to battle concurrent crises. We are now in a mentality as investors where strong economic growth and stable inflation are interpreted as bad news — and crypto markets seem to feel the same way. This is particularly interesting considering Bitcoin was founded during the financial crisis in direct critique of the loose monetary policy decisions of the Federal Reserve, Bank of England, and others.

The Federal Funds Rate from January 2000 through August 2023. Source: Board of Governors of the Federal Reserve System.

What now seems evident is that we can’t rely on central banks to provide our investment mandates. Rather, we must focus more closely on the actual health of companies and the utility, products, and services they are providing to their customers. In the crypto world, we will have to focus carefully on the viability of the crypto ecosystem, and what it can offer to its users as an alternative or complementary financial marketplace.

In the short-to-medium term, of course, this means that we will all be sitting and waiting for the U.S. Securities and Exchange Commission to make its ruling on the teetering pile of Bitcoin spot ETF applications it has sitting on its desk, submitted by the world’s largest asset managers.

Related: What will Bitcoin do if the Justice Department takes aim at Binance?

Franklin Templeton — one of the oldest asset managers in the U.S. — has joined BlackRock, Fidelity, Invesco, and others in the race to launch a mass-market fund for the world’s biggest cryptocurrency. If even one is approved, this really will mark Bitcoin’s internment into the hall of fame for global assets, and we can expect cryptocurrency to join portfolios around the world as an alternative investment in the coming bull market. Should the SEC favor one industry giant over another, though, we can predict many uncomfortable Upper East Side dinner parties.

If the SEC stays true to form and doesn’t approve any of these applications, Bitcoin and other cryptocurrencies will remain marginal assets. That doesn’t mean they won’t find new price drivers and head back toward previous all-time highs. But we certainly won’t see much action in crypto markets until this issue is resolved in one way or another.

Equally, the FOMC decision and Powell’s comments indicate we won’t see much excitement on the macroeconomic side for the foreseeable future either. But if the U.S. and global economy do return to something like the old normal — unfamiliar territory to any investor under 40 — it may well be exactly what the world, and even cryptocurrency markets, need.

Lucas Kiely is chief investment officer of Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading. He was also the head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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