Past market cycles show how Federal Reserve policy ripples through digital assets. When rates stay near zero, funds flow freely into bitcoin and various tokens, fueling rallies. As rates climb, liquidity tightens and prices often pull back. This process can reveal projects with stronger fundamentals versus those driven by hype. The events of 2021 and 2022 illustrate how changes in borrowing costs can either inflate or deflate market optimism.
The 2021 #Crypto Boom
Throughout 2021, rates stayed historically low, and the Fed continued quantitative easing. The abundance of cheap capital helped drive a massive surge in bitcoin’s price, as well as a speculative frenzy in altcoins and decentralized finance. Retail and institutional investors poured money into the space, amplifying gains. Bitcoin’s value as digital gold found wide recognition as many saw it as a hedge against the predictable inflation that would manifest as the economy was flooded with dollars.
The 2022 Crypto Crash
In 2022, the Fed reversed course, hiking rates aggressively to combat intense inflation. Higher yields on government bonds lured investors away from speculative positions, triggering a sell-off across digital assets. Bitcoin’s price declined sharply, though many altcoins suffered even bigger losses. The strong dollar also added headwinds, as dollar-based investors found less reason to chase higher-risk bets. This rapid tightening exposed the weaknesses of over-leveraged investors, culminating in a widespread market downturn.
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