The Fed Hiked Rates for the First Time Since July 2023. History Says This Happens Next for Crypto.

On Sept. 16, the Federal Reserve raised its benchmark rate by a quarter of a percentage point, its first rate hike since July 2023, in a unanimous vote. Rate hikes are generally a headwind for Bitcoin (CRYPTO: BTC) and other cryptocurrencies, which tend to perform best in low-rate environments. When rates are high, investors are more likely to opt for bonds over riskier assets.

Despite this, the crypto market has performed well since the rate hike, with Bitcoin up 10% (as of Oct. 11). However, if history is any indication, crypto investors shouldn't get too comfortable.

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The most recent parallel

You don't need to look too far back for a comparable situation. In March 2022, the Fed hiked rates to counteract inflation. At the time, Bitcoin was roughly 40% below its prior peak. The leading cryptocurrency performed well at first, rising 18% over the next 12 days. But crypto would soon enter a bear market, and Bitcoin declined by 65% in 2022. The total crypto market cap plummeted from over $2 trillion to $839 billion.

When the Fed hiked rates last month, Bitcoin was down about 40% from its all-time high last year. Like in 2022, the Fed is expected to continue increasing interest rates. The current macro environment resembles crypto's bear market in 2022, although, in fairness, that period also included the collapse of the FTX exchange. Spot crypto ETFs hadn't gotten SEC approval yet, either, so the market didn't have nearly as much institutional capital invested.

Higher rates don't always spell doom for the crypto market

Cryptocurrency hasn't been around long -- Bitcoin launched in 2009 -- so it has only experienced two rate hike cycles. The earlier cycle began in December 2015. The Fed continued raising rates until December 2018, and then began cutting in July 2019.

This cycle worked out better in the long term for Bitcoin. After the first rate hike on Dec. 16, 2015, Bitcoin dropped 16% over the next month. However, it was up 63% after six months and 73% after a year. Even as rates rose, Bitcoin went on a bull run that continued until the end of 2017.

The crypto market looked very different back then. Investing in cryptocurrency wasn't nearly as commonplace. Bitcoin had a market cap of about $6.5 billion when the Fed raised rates in December 2015. It didn't take nearly as much money or positive attention for Bitcoin to skyrocket in value back then as it does now, since it's worth $1.7 trillion at the time of this writing.

What happens next

It seems like a good bet that the crypto market will be choppy over the next six months to a year, and it could experience another downturn. That's what happened the last time the Fed began a rate-hike cycle, and most Federal Reserve officials expect another rate increase in 2026. The recent bounce in the crypto market could be a relief rally that fades by the end of the year.

Nothing's guaranteed, and it's certainly possible that the crypto market could continue its recovery despite any rate hikes. It's also worth remembering that Bitcoin and other cryptocurrencies eventually recovered from the 2022 bear market. For as volatile as it is, the crypto market has favored long-term investors.

Lyle Daly has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.