History Suggests the Crypto Market Is About to Skyrocket Because of This Little-Known Fact

Things are getting better in the crypto world. After a brutal crypto winter, many cryptocurrencies are at or near all-time highs and the future is finally looking bright once again.

But the situation looks set to get much brighter for one important reason; Central banks around the world are starting to lower interest rates.

The two may seem unrelated, but the links between central bank actions and crypto market behavior run deep. For investors, this presents an attractive opportunity. A new wave of liquidity could soon be injected into the market, potentially paving the way for a major crypto boom.

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Central banks begin to reduce interest rates

Recently, the European Central Bank (ECB) and the central banks of Canada, Switzerland and Sweden reduced their benchmark interest rates. These pivots followed some of the most aggressive rate hikes in decades, initiated by banks as part of efforts to curb rising inflation.

Although the US Federal Reserve has not yet started cutting interest rates, optimism is growing among market observers that it will do so by the end of this year. Given that the US is still the world’s largest economy, this potential policy change is seen by many as the final domino to fall to usher in a more favorable environment for risk-bearing assets such as cryptocurrencies.

Why do interest rates matter for crypto?

At first glance, interest rates and cryptocurrencies may seem to exist in completely separate spheres. Cryptocurrencies operate in decentralized networks with their own monetary policies. But they are inextricably linked to the wider economy.

Crypto is a risk-bearing asset class; This means that it tends to perform well when investors are generally more willing to accept more risk in the pursuit of profit. This usually occurs in periods when money is cheap and abundant and liquidity is high. For such a scenario to happen again, interest rates will need to be reduced.

To understand why central bank interest rate cuts would benefit crypto, it can help understand the impact of increasing interest rates. When central banks increase interest rates, borrowing becomes more expensive, resulting in a decrease in the amount of money circulating in the economy. High interest rates also make low-risk interest-earning assets more attractive, further reducing the amount of money invested in risky assets.

Conversely, when interest rates fall, borrowing costs fall and liquidity increases. Low interest rates also reduce the appeal of savings accounts and bonds. With excess capital circulating, this liquidity often finds its way into various asset classes, including stocks, real estate, and yes, cryptocurrencies.

The story continues

historical evidence

We don’t have to look too far back to see evidence of how powerful the impact of low interest rates can be on the crypto market. In 2020, central banks around the world reduced interest rates to near zero in response to the economic effects of the COVID-19 pandemic. This resulted in an unprecedented injection of liquidity into the global financial system.

Conclusion? The crypto market has grown from approximately $190 billion to over $2 trillion. The leading cryptocurrency Bitcoin (CRYPTO: BTC) saw its price rise from around $7,000 at the beginning of 2020 to around $69,000 by November 2021.

One of the most impressive examples to emerge from the 2021 bull market was Solana (CRYPTO: SOL). Driven by waves of increased liquidity (and a fair amount of speculation), it is up more than 25,000% in less than two years.

Staying disciplined amid the boom

Although these rate cuts will not be as dramatic as the cuts in 2020, they will have a significant benefit on crypto. As is common in crypto bull markets, this means some obscure cryptocurrencies will start posting astronomical gains.

However, although this may be easier said than done, it is imperative that investors maintain a balanced perspective and not get carried away by the excitement of speculation; The majority of these cryptocurrencies are not good long-term investments.

To successfully navigate the next phase, investors will need to remain disciplined and focus on blue-chip cryptocurrencies with proven track records and strong benefits. For example, Bitcoin and Ethereum (CRYPTO: ETH) meet these criteria.

Although this strategy may not be as glamorous as investing in the trendy meme coins, it is one of the few proven strategies that provide investors with the kind of returns that only cryptocurrencies can produce.

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RJ Fulton has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.

History Shows The Crypto Market Is About To Soar Due To This Little-Known Fact Originally published by The Motley Fool