Bitcoin has sharply collapsed below $28,000. What is the reason for this behavior of the cryptocurrency market?

One of the main reasons for this collapse was a press release from representatives of the US Federal Reserve. It stated that the Federal Reserve Agency maintains its strict policy of raising the base interest rate to fight inflation in the country. In this regard, market participants began to expect the continuation of economic problems and predictably reacted to this event. Let's take a closer look at what is happening.

Over the past year and a half, the global economy has been experiencing problems with inflation, which manifests itself in rising prices amidst massive pandemic money printing. One of the main methods of combating this phenomenon is to raise the benchmark interest rate, which determines the cost of borrowing by the central bank to commercial banks. The higher the rate, the less activity in the economy due to more expensive borrowing, and vice versa.

Federal Reserve officials began gradually raising the benchmark interest rate starting in March 2022. Their goal is to reduce inflation to 2 percent.

Thus, the situation in the cryptocurrency market indicates the growing concerns of participants about the global economy and its prospects. This circumstance has led to a fall in the price of Bitcoin and requires attention from investors and economic analysts.

Changes in the US benchmark interest rate from March 2022 That said, in late July 2023, Fed Chairman Jerome Powell said that inflation itself has been more resilient than bankers had originally anticipated. However, overall they are prepared to do whatever is necessary to combat it. 

At the beginning of August, the sentiment regarding the Fed's future actions has noticeably improved. As the President of the Federal Reserve Bank of Philadelphia Patrick Harker clarified, bankers do not want to overdo the tightening of the policy, therefore they will not raise the rate any more. It was assumed that it will remain at the current level until the beginning of 2024, after which it will begin to gradually reduce.

However, as it has now become known, at least in words the Fed employees are ready to take any steps for the sake of beating inflation. In other words, they may raise the rate further - which has already been taken into account by participants in the cryptocurrency industry. As a result, after the overnight collapse of the main coins by market capitalization show a sag of several percent in the scale of the day.