How Do Changes in Monetary Policy by Central Banks Affect Cryptocurrency Valuations?
Changes in monetary policy by major central banks, such as the US Federal Reserve, can significantly affect cryptocurrency valuations. A "dovish" policy, characterized by lower interest rates and quantitative easing, can devalue fiat currencies and increase the appeal of cryptocurrencies as a hedge against inflation, often leading to price increases.
Conversely, a "hawkish" policy of higher interest rates and quantitative tightening can make traditional investments more attractive and reduce the amount of liquidity available to flow into speculative assets like cryptocurrencies, often leading to price decreases.
Glossar
Monetary Policy
Principle ⎊ Cryptocurrency monetary policy refers to the pre-programmed, immutable rules embedded in a protocol that govern the supply, issuance rate, and total cap of the native digital asset.
Policy
Framework ⎊ A policy, within cryptocurrency derivatives, options trading, and broader financial derivatives, establishes the foundational rules and guidelines governing market participation, risk management, and operational procedures.
Central Banks
Intervention ⎊ Central banks, within the cryptocurrency, options trading, and financial derivatives landscape, operate as systemic counterparty risk managers, influencing market liquidity and price discovery through open market operations and reserve requirements.