NEW YORK (TheStreet) -- Bitcoin has existed in a zero-interest rate environment since its introduction, but that may be about to change. And if and when it does, the digital currency will feel the impact.
The Federal Open Market Committee (FOMC) will vote this week whether to raise the benchmark interest rate from the 0.25% it has been set at since December 2008. While most analysts believe this week's meeting won't bring a rate hike, they concur that it will likely happen by the end of the year.
The latest dot plot released in the FOMC's summary of economic projections in June indicates that every member expects the benchmark rate to increase to 0.50%-to-0.75% by year's end. And in 2016 and beyond, the expectation is for rates to ultimately settle between 3%-4.5%.
Shorter-term rates have already begun to tick up in anticipation of a 2015 rate hike. With a rate increase all but imminent, investors are bracing for change -- including those with a stake in Bitcoin. And the digital currency may take a hit.
If the Federal Reserve enacts higher interest rates, the price of Bitcoin could be negatively impacted. Two pieces of evidence point to this hypothesis.
Strength of the U.S. Dollar
The dollar should benefit from a rise in the federal funds rate, as it is indicative of a strengthening economy and often leads to increased investment inflows. While this will be helpful for U.S. stocks, it could negatively impact the price of Bitcoin, which has historically shown an inverse relationship with the dollar.