Crypto: The impact of unchanged ECB interest rates on the market

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 crypto market. Indeed, crypto investors closely monitor these monetary decisions, as they influence the perception of digital assets as an alternative store of value.

Interest Rates and Cryptos: An Ambiguous Relationship

The ECB’s continued high interest rates (4.25% for the main refinancing operations, 4.50% for the marginal lending facility and 3.75% for the deposit facility) are aimed at restricting financing conditions and containing inflation. For crypto investors, this policy may have ambivalent effects.

On the one hand, high interest rates make traditional investments more attractive, reducing the flow of capital into riskier assets like cryptocurrencies.

Institutional investors, seeking safe and predictable returns, may turn away from cryptos in favor of more conventional investments.

This could negatively affect the demand for cryptocurrencies, and therefore, their price.

However, for investors looking to hedge against inflation and tight monetary policies, cryptocurrencies may appear as an attractive alternative.

As decentralized and censorship-resistant assets, cryptocurrencies offer potential protection against currency devaluation. This perception could boost demand for cryptocurrencies like Bitcoin, which are seen as a safe haven in times of economic uncertainty.

Reduction of asset portfolios and the impact on the market

The ECB announced the gradual 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 crypto sector, this reduction in liquidity could have various consequences. On the one hand, a decrease in liquidity in traditional markets could encourage some investors to turn to digital assets to diversify their portfolios.

Cryptos, with their high return potential, may seem like an attractive option in a tight liquidity environment.

On the other hand, reduced available liquidity could mean less availability of funds for crypto investments, which could hamper their growth.

Businesses and individuals with less cash could reduce their investments in assets perceived as risky, leading to lower demand and potentially stagnant prices.

Refinancing operations and crypto

Regular repayments of amounts borrowed under targeted longer-term refinancing operations (TLTROs) by banks are also monitored.

These repayments influence the ECB's monetary policy stance and, by extension, the overall financing environment.

For crypto 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 operating in the crypto sector. A decrease in bank liquidity can also affect the appetite for risky investments, including crypto.

At the same time, if economic conditions become too restrictive, some investors could liquidate more traditional assets to invest in cryptos, seeking to diversify their portfolios in the face of more volatile markets. This could lead to significant fluctuations in the prices of cryptocurrencies, increasing their volatility and making them more unpredictable.

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