The prime rate set by the Federal Reserve (Fed) is the lending rate at which banks lend to one another for short periods of time.

If a bank has to transfer or “cash out” funds to a customer but does not have enough reserves, it borrows capital from another financial institution for a short time at a low-interest rate.

The prime rate set by the Fed is the primary tool of monetary policy in the United States. Changes in the prime rate have a huge impact on the financial system and the stock market, and the value of numerous asset classes, including bitcoin and cryptocurrencies, is reflected in the value of these assets.

The Fed’s prime rate and bitcoin prices have historically had an inverse relationship: a decrease in the Fed’s rate leads to an increase in the capitalization of bitcoin and other digital assets and vice versa.

What is the relationship between the Fed’s prime rate and risk level?

Every financial asset has some level of risk. Assets are classified into two groups in terms of macroeconomics:

Risky assets are instruments with variable returns that are affected by investor behavior as well as market dynamics and conditions. Stocks of publicly traded corporations are examples of risky investments. Bitcoin does not yet have a definite status, but it behaves as a volatile and high-risk asset, with price changes that correspond to stock market dynamics.

The yields on low-risk or protective assets are modest, but the prices are often constant. They serve to preserve value during economic downturns. Some of these assets are fiat currencies, precious metals (especially gold), and high-quality government and corporate bonds. Furthermore, higher rates contribute to greater yields on US government bonds, which are the world’s primary anti crisis asset.

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