Earlier this week the Federal Reserve announced that they will be increasing the benchmark interest rate by 0.5%. This news was followed by a short-lived rally in the markets, and then a crash of nearly 5% the following day. A lot of people are nervously wondering what impact these rate hikes will have on their crypto portfolios. 

With inflation officially at 8.5% (but much higher in reality), the Federal Reserve must raise interest rates to appear as though they are fighting against higher prices. However, a mere 0.5% hike is not enough to quell the actual double digit inflation we are currently facing. The Fed would have to raise interest rates much higher to bring down inflation in a meaningful way.

The problem is that doing so would cause indebted nations, corporations, and individuals to default on their debt payments, which have been kept near 0% for over a decade. To learn more about how we ended up here, check out my article on why a paradigm shift in finance is coming sooner than we think. 

At this point, if the Fed wants to appear credible, it has no other choice but to raise rates as inflation continues to rage out of control. This has already pricked the stock market bubble, and some people have started to panic. The masses, however, have been conditioned over decades to believe that the Fed will come to their rescue, lower interest rates, and print money to inflate the value of their homes, stock portfolios, and retirement funds. Here's why this time the Fed won't be rescuing anyone.

Official inflation has not been this high in 40 years, so the Fed would look incredibly bad if they lowered rates to save the stock market again. Due to the government enforced lock downs of 2020 and 2021, greater than 40% of all US dollars in existence were created to bailout corporations and individuals who were impacted and "got with the program". The effect of this money printing is now starting to show up in the price of goods and services, but despite what some banking officials might tell you, this inflation is not transitory - it is only the beginning. 

The effects of the last two years of excess money printing have yet to be fully realized. Inflation will continue to rise and the central banks will pretend that they're actually doing something about it by raising interest rates ever so slightly. Raising interest rates too fast would cause the stock market and the real economy to implode too quickly, so it must be done slowly, in a controlled fashion, in order to implement the solution.

We have been hearing that we are on the cusp of another financial crisis for over a decade now, and to think very smart people haven't been preparing a solution would be incredibly naive. Central Bank Digital Currencies (CBDCs) have been in the news for over three years now as governments constantly push to eliminate cash and bring digital money further under their control. China already has their CBDC operational, while other countries have hinted at implementing them or straight out said they have no intention of using them - which is a clever way to at least get people thinking about them.

These CBDCs will likely be mandated by some governments and a great majority of the population will be coerced into adopting them. However, we must consider that these digital currencies will be in competition with decentralized cryptocurrencies, which offer greater value preservation (by being limited in supply) and global censorship-resistance.

Some people argue that these cryptocurrencies could be outlawed if they grew big enough to threaten the system. However, it would be impossible to issue a worldwide ban as certain countries, such as El Salvador and Central African Republic (and soon others), are taking a positive stance towards cryptocurrencies.

So how will the Fed rate hikes affect the crypto markets in the short-term and the long-term?

In the short-term, the crypto market is going to plunge along with tech stocks, as the majority of investors still see crypto as a risk-on asset. But eventually investors and savers will realize that the inflation of fiat currencies is only going to worsen, despite the central bank's minor rate hikes.

Where will they put their savings if not in a crashing stock market, bond market, or the hyperinflating US dollar? Well, if they don't want to convert their savings into CBDC social credits, cryptocurrencies are their best option - the only form of debt-free, censorship-free money in human history. Cryptocurrencies have been trending towards greater worldwide acceptance since their inception in 2009, and this trend is only going to continue.

Gold and silver prices will likely be pushed up by more conservative investors as well, but with Gold already having a market cap of $10 trillion and younger generations losing interest in it, the gains will not be very substantial. Legit crypto projects, on the other hand, will increase in value more significantly as they continue to gain adoption by small nation states, businesses and individuals.

The key to surviving this financial transition is to have a well-diversified portfolio of several blockchain projects which have a solid team, an engaged community, and have existed for at least a few years. Newer, experimental projects are definitely worth investing in, but should only have a very small allocation in your overall portfolio as they are more prone to hacks and can easily be replicated by other teams if they have yet to achieve a network effect.

Be sure to fasten yourself into this roller coaster as no one knows how long and volatile the ride is going to be. Don't forget to enjoy the ride - we are alive at a very interesting turning point in human history.