Why do cryptocurrencies plummet when the ECB raises interest rates?

The European Central Bank announced it will raise its rates, a first in more than 11 years. This turnaround will affect many sectors of the economy – and cryptocurrencies.

The rumor had been going on since May, before it was finally confirmed on June 9, 2022: the European Central Bank (ECB) will raise its key rates. † Governing Council plans to raise key ECB interest rates by 25 basis points at its July monetary policy meeting ‘, the institution announced in a press release. The goal stated by the ECB is simple: bring inflation back to the 2% medium-term objective

That is important news: it is the first time in 11 years that the ECB has made such a decision. And it is far from trivial: this increase will have a significant impact on businesses, on citizens of the European Union and even on the cryptocurrency market.

The ECB’s announcement will have many ramifications. // Source: Canva

What does the rise in key interest rates mean?

Policy rates are, simply put, the interest rates set by central banks. These settings play the role of banks of banks “, somehow. So the interest rate hike means that it will cost more for European commercial banks, such as the Caisse d’Epargne, to borrow money from the ECB.

Such a measure does not seem to have a direct impact on the daily lives of citizens of the European Union. It does, however: commercial banks will pass this increase on to their customers. Because banks have less easy access to money, they will lend less, and those that do are likely to have higher interest rates. Money will essentially cost more.

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How to avoid cryptocurrency scams?  //Source: GDJ/Pixabay

What impact on the economy?

As credits and loans are less common, it can be expected that there will be less liquidity in the market. The decision to increase the rates is therefore not a trivial decision. † It’s a decision that tends to ‘anti-growth’”, Alexandre Stachchenko, director of blockchain & crypto-assets at the consultancy KPMG, analyzes with Numerama. † When the economy overheats, usually when there is inflation, like now, a rate hike slows the economy but also helps reduce the money supply† And so to limit this inflation.

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When a central bank raises interest rates, the economy tends to contract. // Source: Canva

This drying up of the economy also has consequences for the financial markets. Because it’s not a good time, investors are less likely to buy risky stocks — typical Nasdaq tech companies, says Alexander Stachchenko.

What impact on the cryptocurrency market?

For a long time, the decisions of financial institutions did not affect the cryptocurrency market. But, over the past 6 months we have noticed that the crypto market is following more and more exchange rates says Alexander Stachchenko. This new trend is partly due to the professionalization of the market: retail investors are still present in the bitcoin market, but no longer alone.

In recent years we have seen that the clients of crypto exchange platforms such as Coinbase or Binance are increasingly professionals or institutions. ‘, he underlines. The fact that the market is becoming more professional means that it is increasingly following the trends of the stock market.

As the crypto market is one of the riskiest, it could therefore be hit hard by the ECB’s rate hike in July, when investors prefer to reduce risk. Although bitcoin is going through a rough time and its price has fallen in recent months, this move is not very good news for cryptocurrencies.

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