Coinbase: The current market situation can benefit cryptocurrencies

The essence of the Coinbase review is as follows: experts believe that the actions of the US Federal Reserve will play a decisive role in the current environment. Representatives of the exchange are considering three scenarios:

1. Stop increasing interest rates.
2. A rate hike of 25 basis points with a further suspension of growth.
3. Raise the rate by 25 basis points and then increase it further to curb inflation.

Analysts dismiss the fact that the rate in the current environment can be either increased by 50 basis points or reduced. Whichever of the three scenarios is chosen, the cryptocurrency will still win. Is it so? Let’s take a closer look at all the options.

Stop increasing interest rates

The increase in interest rates by the Fed was carried out to curb inflation caused, among other things, by the actions of the Fed during the coronavirus pandemic and the launch of the “printing press for dollars”. Curbing is obtained with varying degrees of success. Undoubtedly, there are certain results. In January 2023, inflation in the United States fell to 6.4%, in February to 6%. But the Fed says that the goal is to achieve price increases within 2%. So far, US regulators are not at all close to this. Therefore, it is unlikely that we will see a complete cessation of the growth of interest rates. This would have been possible had the banking collapse been on a larger scale. But it looks like the worst is behind us.

Let’s assume that the increase does happen. How will this affect cryptocurrencies? If rates are not increased, then loans in banks will cease to rise in price. If so, then Americans should be more interested in borrowing. In fact, loans will act as relatively cheap money. And they, in turn, can be invested in cryptocurrency. We will have to agree with the conclusions of Coinbase: in this case, we will indeed get an increase in the cost of bitcoin and altcoins.

Slight rate increase followed by a pause

This is a more realistic option than the first one. All for the same reasons. Inflation remains high, in order to curb it, the Fed must raise rates. A 25 basis point gain could help smooth things over as public discontent builds. The head of the Fed was already interested in the growth of unemployment, and then there was also unrest about the banks.

In this scenario, theoretically, we again get the situation described in the first case. Only here there will be some delay in time, since at the moment the rate, although slightly, will rise.

Slowing rate growth with its further rise

According to Coinbase experts, this is the most likely option. Why is that? The Fed, analysts of the crypto exchange believe, are confident that they have already coped with the banking crisis and stopped the wave of discontent. In this regard, it is reasonable to slightly reduce the pace of rate increases in order to consolidate the result. On the other hand, no one has canceled inflation, and it is necessary to raise the rate. After everything stabilizes, public outcry and discontent will decrease, it will be possible to continue to increase the rate.

Will the cryptocurrency grow in this case? Here are already possible different options. If the banking crisis subsides and rates continue to rise, where will people get their money from? Expensive loans, one way or another, will be taken with less zeal. Another question is that it is worth considering interest in different cryptocurrencies separately.

For example, Bitcoin is scheduled to have a halving in 2024. The reward for the found block will be halved, the supply will decrease, and therefore the price should rise. Sounds reasonable. On the other hand, we can take some project like Solana, where the emission is not limited. Will investors be just as willing to invest in it – only time will tell.

Let’s also consider options that Coinbase economists dismiss as unrealistic or highly unlikely.

Rate cut

It’s hard to object to Coinbase specialists here. The Fed will start from the situation with inflation, and it is high. Bank troubles are rather one-time rather than systematic. So the likelihood of such a scenario is really low.

For cryptocurrencies, by the way, this would also be an acceptable option, since before the banking collapse and the risk of a recession with the “actively working printing press”, people were quite willing to invest in high-risk assets, including in order to protect savings from depreciation.

0.5% rate increase

We could see a 50 basis point upside option if there were no problems with Silvergate Bank, Silicon Valley Bank and Signature Bank. In the current environment, the Fed should probably reassure investors by easing the rhetoric and moving forward by raising rates again. In general, under the current conditions, such a variant of events is less likely than it was at the beginning of March. But still more real than lowering the interest rate.

The more expensive loans, the worse for digital assets. For individuals, the fear of losing their savings will prevail over the desire to earn millions of dollars. However, this can be argued only before the onset of a recession or a new serious economic crisis. Then the cryptocurrency can become a safe haven for assets at a time of instability in the economy.

Conclusion

The opinion of Coinbase specialists looks quite reasonable against the backdrop of the banking crisis in the US and the actions of the Fed. At the same time, representatives of the exchange make the most cautious forecast in order to take into account the full range of scenarios and not miss all the possible risks.

This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.