How Do Interest Rates Affect the Stock Market and Cryptocurrencies?

 

Interest rates are one of the most important economic tools that directly affect the lives of individuals and the performance of companies and financial markets. They represent the cost of borrowing and the yield of saving and thus play a pivotal role in investment, expenditure and financing decisions. But what makes interest rates have such a broad impact on the economy and financial markets?

What Are Interest Rates and Why Do They Matter

Definition of interest rates :

Interest rates are the ratio that a borrower pays to a lender for using money for a certain period of time, and are considered the cost of borrowing or the return on saving.

Who sets interest rates and why do they change?

Each country's central bank (such as the European Central Bank or the US Federal Reserve) sets key interest rates, based on goals such as controlling inflation, supporting economic growth, or stabilizing the currency.

Interest rates change as a result of changes in economic conditions, such as inflation, growth, or unemployment.

Difference between high and low interest:

High interest: reduces borrowing, slows spending and investment, and helps curb inflation.

Low interest: encourages borrowing, increases spending and investment, and stimulates economic growth.

In short, interest is a tool that balances economic growth and price control.

How Interest Rates Affect the Stock Market

Investor Behavior and Risk Appetite

When interest is high, investors prefer safe assets such as bonds. When it decreases, investors look for higher returns in risky assets, such as stocks and real estate, which increases risk appetite.

Sectors Most Sensitive to Rate Changes

Sectors most affected by interest rate changes include:

Real estate: because of its heavy dependence on financing.

 

Banks: where interest affects their profit margins.

Durable goods and cars: because their sales depend on consumer loans.

The Link Between Interest Rates and Cryptocurrencies

Risk-on vs. Risk-off Assets

In a low interest environment, investors tend to risk-on assets such as stocks and cryptocurrencies in search of higher returns.

In the case of high interest rates, investors turn to safe assets (risk-off) such as government bonds and gold to reduce risks.

Liquidity and Market Volatility

Lower interest rates mean greater liquidity in markets, which supports stability and reduces volatility.

Raising interest rates leads to the withdrawal of liquidity, which increases market volatility and weakens the ability to finance easily.

Impact on Bitcoin and Altcoins

Cryptocurrencies such as Bitcoin and altcoins typically benefit from lower interest, as investors look for alternative assets with higher returns.

But in a high interest environment, demand for them decreases in favor of traditional assets, and their volatility increases due to lower liquidity and higher risk.

Historical Examples of Interest Rate Impact on Markets

Financial markets, both traditional and digital, have witnessed strong movements in response to interest rate changes decided by the US Federal Reserve. Here are some notable examples:

1. Interest raising cycle (2015–2018)

After the global financial crisis, the Fed began gradually raising interest rates from near-zero levels:

Its impact on markets:

US stocks (S&P 500): continued to grow with some volatility, supported by strong economic growth.

Bitcoin: It saw a significant rise in 2017, but was followed by a sharp decline in 2018, partly affected by tightening monetary policy and declining liquidity.

2. Fast interest rate hike (2022–2023)

To confront high inflation after the Corona pandemic, the Federal Reserve raised interest rates at an unprecedented pace:

Traditional markets:

Stocks: US indices fell in 2022, especially growth and technology companies due to higher cost of capital.

Bonds: Their prices fell, raising their yields significantly.

Digital Markets:

Bitcoin and Ethereum: Recorded sharp declines, as investors lost risk appetite due to tightening monetary policies.

Decentralized Finance (DeFi): Significant decline in trading volume and asset value.

What Investors Should Do During Interest Rate Changes

Changing interest rates create challenges and opportunities for investors. A good understanding of their impact can help protect capital and achieve sustainable returns.

Diversification Strategies

Diversification remains one of the most important tools for reducing risk:

 

Distribute your investments between stocks, bonds, real estate, and gold.

List assets from different sectors and markets to reduce reliance on the performance of a single category.

In a high interest environment, it may be wise to put more weight on fixed-yield bonds or defensive stocks.

Safe-haven Assets vs. High-risk Assets

Safe assets such as gold, government bonds, and cash are more stable and are used for protection in periods of volatility or high interest.

High-risk assets such as cryptocurrencies, technology stocks, and startups may achieve greater gains, but they are negatively affected by higher interest rates and lower liquidity.

The balance between the two types depends on the investor's risk appetite and market conditions.

Long-term vs. Short-term Planning

Short-term: keep an eye on rapid changes in monetary policy, be flexible in managing liquidity and move assets.

 

Long-term: Focus on asset quality and continued growth, and stay committed to a balanced investment strategy that takes into account your financial goals.

Is interest hikes always bad for the stock market?

Not necessarily. In some cases, a rate hike is seen as a sign of a strong economy, which could support stocks, especially in defensive sectors.

But overall, higher interest leads to lower growth and technology stocks due to higher financing costs and lower future valuations.

 

Why do digital currencies fall when interest rates rise?

Raising interest rates reduces liquidity in the markets and makes high-risk assets such as digital currencies less attractive. Investors tend to be safe and prefer fixed income instruments, which leads to a decrease in demand for cryptocurrencies and a decline in their prices.

 

What is the relationship between interest and inflation?

Central banks raise interest rates to combat inflation; High interest rates reduce borrowing and spending, which reduces inflationary pressures.

Conversely, lowering interest stimulates spending and investment, and may lead to higher prices if demand increases significantly.

Conclusion

Interest rates constitute a pivotal element in economic balance, as they directly affect investor behavior, corporate performance, and the movement of financial markets –, whether traditional or digital. Raising or lowering interest rates does not occur in isolation from the general economic context, but rather is used as a tool to control inflation, stimulate growth, or protect financial stability.

General advice to investors:

Follow interest rate movements and understand their economic context, but do not rush your investment decisions. Rely on portfolio diversification, risk management, and long-term planning, and don't forget that markets go through cycles, and opportunities are always there for those who prepare well for them.