- There needs to be more research that can conclude what exactly affects the crypto market.
- An increase in the interest rates in the US has material effects on African economies.
- News about future interest changes will significantly change the crypto market because investors are always pricing in the future.
In February 2023, The Federal Reserve Bank released a crypto report, “The Bitcoin- Macro Disconnect”. The paper investigated the linkage between Bitcoin and macroeconomic fundamentals: Estimating the effect of macroeconomic news on Bitcoin. The research happened between 2017-2022. The primary outcome stated that Bitcoin and other crypto assets are decoupling from monetary and macroeconomic news. The focus was more on BTC because the other assets are less liquid, making it harder to analyse their price action.
According to the report, the crypto market in 2021 hit a market cap of US$2.5 trillion, while that of BTC managed to touch the US$1 trillion mark. To verify bitcoin’s decoupling from other macroeconomic factors, the paper’s authors used three categories to determine how BTC responded to the following factors.
- News about Interest Rates- How BTC responded to news around interest rate changes or the Federal Reserve’s intention to change interest rates.
- News about the Economy- How BTC responded to news such as the unemployment statistics
- News about Inflation- How BTC responded to the news around Consumer Price Index
BTC unaffected by macro factors
The 6- year research showed that BTC had not been affected by macro factors as much as other assets. This is surprising as unexpected changes should, in principle, affect the price of bitcoin as it has no intrinsic value (BTC is a speculative asset).
In all fairness, there is little to no research that can conclude what exactly affects the crypto market. So far, what is sure is that crypto prices are determined primarily by adoption rates.
How BTC is affected by news around interest rates
Debts become cheaper when interest rates are low, making borrowing easier. This raises the total money in supply, which increases the price of everything, including BTC. When interest rates are high, debt is expensive, making it more difficult to borrow. This reduces the money supply, and the price of everything, including BTC, decreases.
A case example: When the Federal Reserve announced raising interest rates in November 2021, the price of almost everything in the world plummeted. Before that, the interest rate had been low since 2008, and vice versa happened.
Hypothesis 1: Higher interest rates will hurt BTC price. Consequently, news about future interest changes will significantly change the crypto market because investors are always pricing in the future.
To put this into context, here is a brief explanation of how interests rate from the Federal reserve affect Africa.
How Federal Reserve interest rates affects Africa
An increase in the interest rates in the US has material effects on African economies, including:
- Depreciation of Currency- A rise in interest rates causes capital outflows from African markets as imports from the United States to become more expensive, leading to inflation.
- Debt Servicing Costs- The US is among the largest debt issuers in Africa. African countries that have borrowed in dollars pay more to service debts when interest rates increase.
- Reduction in export prices- African economies rely on exports to the US. An increase in interest rates reduces commodity export prices, affecting revenue generation.
- Issuance of Remittances- An increase in Interest rates reduces the money being sent home due to a reduced money supply
Remember: A decrease in money supply makes the price of everything, including BTC, go down.
How BTC is affected by news around inflation and unemployment
Inflation and unemployment are directly related to interest rates. Higher interest rates result in lower inflation but higher unemployment and vice versa. Central Banks around the world use interest rates to manage inflation. This is the reason why inflation news is in demand from investors.
Lower inflation means that Central Banks will lower interest rates sooner, which means there is more money supply as borrowing is more accessible, consequently pumping the markets up.
Interestingly, it’s suitable for investors when the unemployment rate is high. Why? Higher unemployment will force Central Banks to lower interest rates to increase the money supply through borrowing, causing the markets to go up.
When the unemployment rate is low, central banks increase interest rates to reduce the money supply causing the speculative market to plummet.
BTC fails to respond to interest rate news
To start off, the CoronaVirus pandemic, which hit the world at the end of 2019, did not affect BTC as it affected other sectors of the economy. It was in 2021 that BTC hit its highest, trading at US$69,000.
In June 2021, the Federal Reserve commented on raising the interest rates. Nonetheless, the price of BTC continued to pump for six months. To read more on the report, click here.
In conclusion, the Federal Reserve admitted that the analysis might not be as extensive as data on the behaviour of BTC is limited.