Bitcoin (BTC) experienced a sharp drop of up to 9% on Thursday night last week.
However, the minutes of the FED's July meeting were announced and were interpreted as hawkish by some analysts.
Higher interest rates also raise real rates, which are nominal rates adjusted for inflation. Real rates reflect the true cost of borrowing and lending and have a significant impact on the crypto market.
Mark Connors, head of research at Canadian investment fund manager 3iQ, said in a statement that Bitcoin's volatility will continue if real rates remain high.
Connors added that this is a “healthy cleanup” of some of the excesses in the crypto market, a reminder that liquidity is still scarce and that the cryptocurrency market still needs regulation. He said crypto needs regulatory clarity so that institutional buyers can enter the industry and provide stability and liquidity.
The analyst compared the situation to the high-yield debt market, which had problems in its own right in the 1980s but eventually became a key asset for many investors:
“If we gain regulatory clarity and ensure that institutions can only buy, then when there are 10% or 15% drops, institutions will not sell their 1% to 2% holdings in Bitcoin against stocks, they will add more.”
He also said that having companies with a long-term perspective on Bitcoin will ensure a more balanced market where selling pressure will be met by buying demand:
“When bitcoin goes up, it will sell to people who buy it. This is a healthy functioning ecosystem.”
However, according to the analyst, institutional companies are reluctant to enter the crypto space until regulatory issues are resolved.
That's why the recent applications for BTC ETFs by BlackRock, Fidelity, and others are so important, according to Connors. “Until this issue is resolved, capital cannot enter the industry to help absorb this shock,” the analyst concluded.
*Not investment advice.