How do interest rates affect crypto?

Interest rates and crypto are connected mostly through risk appetite. When the Federal Reserve raises rates, safe assets pay more and borrowing costs more, which has tended to pull money away from risky assets like crypto. When rates fall, the opposite pressure can apply, though plenty of other forces move crypto too.

How do interest rates reach crypto in the first place?

The Fed's main tool is the federal funds rate, the overnight rate banks charge each other. According to the Fed, changes in it pass quickly into short-term rates such as Treasury bill yields and, through expectations, into longer-term rates. The Fed says lower rates tend to lift stock prices and household wealth, and that rate changes also move the dollar.

Crypto pays no built-in interest (see does crypto pay interest or dividends). So when a Treasury bill pays more, the cost of holding a non-yielding asset goes up.

What happens to crypto when interest rates rise?

Research points to downward pressure. An August 2023 IMF working paper found that a single common factor explains about 80% of the variation in crypto prices, and that tighter US monetary policy pushes that factor down. The authors tie this to the risk-taking channel, the same one that affects equities, which challenges the idea that crypto protects against market risk.

The 2022 to 2023 period is the clearest recent example. A Motley Fool article published on Nasdaq notes the Fed raised rates 11 times in a row in that stretch, taking its target from near zero to 5.25% to 5.50%. That period overlapped with a deep crypto winter.

What happens to crypto if the Fed cuts rates?

Cuts make cash and bonds pay less, which can push some investors toward riskier assets. The same Nasdaq article says the Fed cut rates six times in a row across 2024 and 2025 and that bitcoin and ether rebounded in that period, while many smaller altcoins did not.

A Bundesbank study from 2021 also found that a rate cut would raise bitcoin in its model. But the effect was limited. Markets also tend to price in expected moves before the announcement, so the reaction on the day can be muted or even reversed.

Do interest rates matter more for crypto than other factors?

Not necessarily. The Bundesbank concluded that monetary policy explains only a small part of bitcoin's swings. It pointed to risk appetite, adoption by companies and investors, and regulation as major drivers. Rates matter, but they are one input among many.

For related reading, see how inflation affects crypto and does crypto follow the stock market.