Raising Interest Rates & Your Crypto Investments

[Joe Robert]

The crypto market is currently experiencing one of the most significant downturns in the past 18 months. Unsurprisingly, crypto is still viewed as a risk-on asset amongst institutional investors, especially those who came into the market in the past 24 months. Alas, after the Fed’s recent confirmation/announcement regarding raising interest rates, we believe that crypto assets will be affected significantly as the asset class as a whole will face a completely different macro environment for the first time.

Since the financial crisis in 2009, the Fed has never really been in a “let's raise interest rate” mode with the exception of a few occasions that would eventually get reverted due to the market’s reactions. If it wasn’t for Covid-19 and the need to boost the economy, which then causes inflation, we don’t think that the Fed would be raising interest rates anytime soon. Unfortunately, the reality is that inflation is not transitory, or at least not as transitory as what the Fed had hoped for.

One of the simplest tests to assess whether inflation really exists in our daily lives is by looking at the price of food. When a small business or a fast-food chain jacked up their price either because of labor shortages or supply-chain issues, it will be instantly reflected in the price.

To see inflation is occurring take a look at some price increases for your Super Bowl 2022 party compared to last year's!

Although the technological and business model innovations in crypto are real, we can’t deny that the entire asset class has benefited from cheap capital since the Fed turned on the money faucet post-2009 financial crisis. If the Fed is really determined to drastically reduce the amount of money they poured into the market, crypto will most likely be affected in the short to medium term, but not so much in the long term.

The Fed can’t continuously raise rates without damaging the growth of the economy. At one point in the next few years, rates will either be stable or they’ll be forced to reduce it back down as other central banks around the world (such as China) decided to do otherwise and lower their rates instead. Additionally, crypto as an asset class is extremely global. We think that this is a fact that is often overlooked by institutional investors. The amount of private capital on the sidelines around the world that is waiting to get exposure in the crypto market is enormous.

Last but not least, as investors chase yield, the amount of options available in the market is becoming less and less, and one would be required to enter crypto sooner or later. Emerging markets contain many risks and are difficult to navigate. Web 2.0 or traditional tech private market has been dried down as notable VC firms have captured all of the upsides. Crypto an asset class will get there too, but we strongly believe that there are still a few decades left before that eventually happens.