What will the impending US interest rate decision do to bitcoin?

The first answer that springs to mind is: nothing, why would it? After all, isn’t bitcoin a decentralized currency not linked to any currency or major economy…

The United States interest rates are set by the US Federal Reserve and determine not just the value of US dollar, but also effect the entire US economy, and to some extent, the entire world. With an expected announcement of a rate hike on the 15th of December all eyes are on the chair Janet Yellen for this historic event.

From mid-2014 to early-2015, the US dollar index (a comparison of the US dollar to a basket of foreign currencies) steadily increased while interest rates remained on hold. In the same period, bitcoin steadily decreased from approx US$650 to US$200. For most of 2015, both the US dollar index and bitcoin have been fairly flat, otherwise known as a sideways consolidation.

In October, rates were not changed by the Federal Reserve. This saw a slight bump in the US dollar index which was nothing compared to the almost doubling of the bitcoin price in the space of two weeks following this announcement. If rates are increased at the upcoming meeting, it stands to reason that the US dollar will strengthen and this could see the bitcoin price reduce in comparison as it did in 2014. However, if rates are held at historic lows it could again increase speculation in bitcoin and see the price shot for the moon. Hold on to your hats!

Some may have noted that this inverse price relationship to the US dollar is similar to that of gold. The price of gold has long been linked to the US dollar and generally the gold price decreases when the US dollar strengthens and vice versa.

So, whatever happens next week, there is no doubt that the volatility of bitcoin will see it swing wildly compared to the US dollar index in whichever direction it goes.

So I’ll leave you with a question to ponder… could bitcoin become the digital equivalent of gold, or is it already there?