How rising interest rates could affect the volatile crypto market?

The cryptocurrency rate is increasing day by day. Volatility is a measure of how much the value of a particular asset has increased or decreased over time. In general, the more volatile an asset is, the riskier it is considered as an investment - and the more likely it is to offer higher returns or higher losses in the short term than a relatively volatile asset. Rising interest rates of crypto could affect the volatile crypto market.

Cryptocurrency is attracting fancy investors but high price volatility is keeping someone else away. For example, the minimum price of Bitcoin in October was Rs 54,942 (October 3), and as of October 27, the maximum was Rs 62,672 (October 17), a difference of about 14 percent. Even other cryptocurrencies have had high volatility in prices in the past.

The main reason for the instability in crypto is their innovation. All new ideas take time to settle down and be accepted, and this is true of cryptocurrency. Asset class, market, as well as investors/speculators, are still finding their footing and so it is still in the early stages of price discovery.

Cryptos have gained worldwide prominence in the last few years, but as an asset class, they are no longer accepted as traditional assets like equity or gold. Increasing market acceptance and maturity go hand in hand. This is why when Tesla indicates that cryptocurrencies will not be accepted as a payment method, the value of Bitcoin crashes. But when Tesla boss Elon Musk wrote 'Doge' in his Twitter post, the value of Dogecoin increased.

Such influential events or personalities are increasing instability, just as when some star investors buy shares of a particular company, the price of those shares continues to rise.

Due to a lack of understanding and rules, trading is currently highly speculative. Investors place bets on rising or falling prices and these speculative bets cause sudden flow or outgrowth, which leads to high volatility.

High-interest rates generally refer to a low appetite for high-risk / high-return assets such as cryptocurrencies. Theoretically, this should mean that the crypto market will experience price declines at various points this year, although growth may be slight. Therefore, the appetite of investors for risk may not be reduced beyond the initial push of each growth.

Cryptocurrency has also declined. Bitcoin was 5% lower. Ethereum was down about 7%. These are the same cryptocurrencies that we are told do not follow the normal rules of currency and stock.

But when interest rates rise sharply here and now, long-term betting looks less attractive. And thus, cryptocurrency is acting much like that high-flying tech stock. They, too, had big dreams for the future, and investors were a little tired of the sky.

For some crypto investors, high volatility is part of the appeal. It creates the possibility of higher returns. But similarly, the risks remain the same.

For low-risk investors, there are strategies that can be used to limit the negative effects of higher interest rates as a dollar-cost average. And now there are cryptocurrencies that are specifically designed for less volatile stablecoins (including USD coins and dai). They value a reserve asset like the US dollar.

For every other asset class that has some kind of governing or controlling entity, cryptocurrencies are not regulated by their nature in the traditional sense by any entity such as fiat currency or equity or bond.

As cryptocurrencies become more popular and accepted, more investors will understand the reasons why their circulation is affected. Until then, many movements are speculative in nature because investors are buying or selling based on sentiment.

Many young investors are investing in crypto. Their goal is to invest quickly and make a profit. So when they lose a lot, they usually leave the market, which leads to market volatility. So the higher the interest, the more risky the volatile crypto market will be.

Bottom Line

The crypto market is more volatile than other markets. But the higher the risk of instability, the higher the reward. In that sense, instability is not the enemy and is not such a big concern because returns can be high. However, as an investor, you should invest wisely.