Markets
Market impact of ECB interest rates
7h10 ▪ 4 min read ▪ by Evans S.
On July 18, 2024, the Governing Council of the European Central Bank (ECB) decided to keep key interest rates unchanged. This decision, aimed at controlling persistent inflation, raises crucial questions about its impact on the cryptocurrency market. Indeed, cryptocurrency investors closely monitor these monetary decisions as they influence the perception of digital assets as an alternative store of value.
Interest Rates and Cryptocurrencies: An Ambiguous Relationship
The ECB’s maintenance of high interest rates (4.25% for the main refinancing operations, 4.50% for the marginal credit line and 3.75% for the deposit facility) aims to limit financing conditions and contain inflation. For cryptocurrency investors, this policy can have ambivalent effects.
On the one hand, high interest rates make traditional investments more attractive, thus reducing the inflow of capital into riskier assets such as cryptocurrencies.
Institutional investors, looking for safe and predictable returns, may abandon cryptocurrencies in favor of more conventional investments.
This could have a negative impact on the demand for cryptocurrencies and, consequently, their price.
However, for investors looking to hedge against inflation and tight monetary policies, cryptocurrencies may seem like an attractive alternative.
As decentralized and censorship-resistant assets, cryptocurrencies offer potential protection against currency depreciation. This perception could strengthen demand for cryptocurrencies like Bitcoin, seen as a safe haven in times of economic uncertainty.
The reduction of asset portfolios and the impact on the market
The ECB has announced the progressive reduction of its portfolio of securities purchased under the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP). The reduction of the PEPP by €7.5 billion per month until the end of 2024 illustrates a measured approach to managing liquidity in the market.
For the cryptocurrency sector, this reduction in liquidity could have different consequences. On the one hand, a decrease in liquidity in traditional markets could push some investors to turn to digital assets to diversify their portfolios.
Cryptocurrencies, with their high potential returns, may seem like an attractive option in an environment of limited liquidity.
On the other hand, the reduction in available liquidity could lead to less funds available for cryptocurrency investments, which could hinder their growth.
Companies and individuals with less liquidity may reduce their investments in assets perceived as risky, resulting in lower demand and potential price stagnation.
Refinancing operations and cryptocurrencies
Periodic repayments of amounts borrowed by banks under targeted longer-term refinancing operations (TLTROs) are also monitored.
These repayments influence the ECB’s monetary policy stance and, by extension, the overall financial environment.
For cryptocurrency market participants, refinancing operations are important because they affect the overall availability of funds. If banks have less liquidity to lend, this can tighten financing conditions for companies, including those in the cryptocurrency sector. A reduction in bank liquidity can also affect the appetite for riskier investments, including cryptocurrencies.
At the same time, if economic conditions become too restrictive, some investors may liquidate more traditional assets to invest in cryptocurrencies, seeking to diversify their portfolios in the face of more volatile markets. This could lead to significant fluctuations in cryptocurrency pricesincreasing their volatility and making them more unpredictable.
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by Evans S.
Fascinated by bitcoin since 2017, Evariste has not stopped documenting himself on the subject. If his main interest is on trading, the wise man is desperate to discover all the advanced centers on cryptocurrencies. As an editor, he aspires to permanently provide high-quality work that reflects the state of the sector as a whole.
DISCLAIMER
The views, thoughts and opinions expressed in this article are solely those of the author and should not be construed as investment advice. Do your own research before making any investment decisions.