How to Manage Your Crypto Investment In the Midst of Inflation and Fed Interest Rate Hike
You might have already observed that the prices of an overwhelming majority of goods and services have gone up since the beginning of this year due to historic inflation. To overcome the inflationary pressures, the Federal Reserve decided to tighten the monetary policy by raising the interest rate by 0.5 percent in May - the biggest increase since 2000.
While this move may help with managing inflation, it is also going to have an effect on investment drivers, particularly ones that are more prone to price volatility.
Why Did Federal Reserve Increase the Interest Rate?
Before we can realise the implications of the interest hike by the Fed, it is important to understand the underlying reasons. With inflation touching the 8.5% mark, the Fed has a duty to ensure the economy doesn't spiral out of control.
Increasing the policy or interest rate raises the cost of borrowing money. This results in reduced spending that drives the demand down to decrease the inflation rate without causing an economic recession. That being said, it is a tight rope to walk on as the Fed needs to find the right balance between controlling inflation and bringing the economy to a complete halt.
Apart from inflation management, increasing the interest rate also allows the Federal Reserve to sell bonds that reduce its outstanding loans. This cuts down the amount of money in the economy and decreases consumption.#
What Does the Interest Rate Hike Mean for Crypto
In simple terms, an increase in interest rate is not good news for the crypto market and we will continue to see the recent volatility at least in the short term. Basically what happens is that when Fed increases the policy rate, investors tend to become more conservative with their spending. It has become quite clear that cryptocurrencies are behaving like technology stocks which have also witnessed a downturn.
On the positive side, even with the increase of 0.50% in the interest rate, BTC price demonstrated stability and even saw a slight surge. The more important concern for investors is what's next on the cards and if there will be any more interest rate hikes in the future. While the Fed has outright refused the possibility of a 0.75% increase, investors remain uncertain. Here are a few steps you can take in these times:
- Long-Term Focus
There are robust fundamentals that are going to continue to drive the economy forwards. From low unemployment rate and record corporate profits to stable currencies and eager consumers, it would be a better approach for investors to have a long-term game plan instead of focusing too much on the recent price volatility of assets.
Short-term losses can cause anxiety, but letting emotions guide investment decisions can prove costly. A key factor in coping with market volatility is to focus on long-term results rather than the daily fluctuations along the way. Think ahead and keep your eye on the goal.
- Market Volatility as an Opportunity
Great investors look for lucrative investment opportunities during economic downturns. While the crypto market is bearish right now, the strong fundamentals are still there that have enabled the cryptocurrencies to recover and break all past records. Bitcoin lost 75% of its value in 2018 to hit the all-time high of $69,000.