📈 Interest Rate Interest Rate
The price of borrowing money. A borrower pays a percentage fee on a loan, and a lender or saver earns a percentage for letting someone else use their money. Think of it as rent on money.
🏦 Rent on money, in plain terms
If you borrow money, you pay it back plus a little extra. That extra, written as a yearly percentage, is the interest rate. Flip it around and the same number works in your favour: when you let a bank or a protocol hold your money, they pay you a rate for the privilege. So a rate is the price of using money you don't own — rent, charged by the year.
🎚️ Who sets the big rate?
One rate sits above all the others. A central bank, such as the US Federal Reserve, sets a benchmark called the federal funds rate through its policy committee, the FOMC. It is the rate banks charge each other for overnight loans, and it ripples outward: the rates on your loans, credit cards, and savings accounts all move with it. Central banks raise or lower this number to steer the economy and keep inflation in check.
| When rates are… | What tends to happen |
|---|---|
| 📈 High | Borrowing gets expensive, so people borrow less and save more. The economy cools. |
| 📉 Low | Borrowing is cheap, so people spend and invest more. The economy heats up. |
| 🧊 Negative | A rare, last-resort tool in severe downturns. You don't meet this one day to day. |
🪙 Why a crypto beginner should care
Rates set the mood for risky assets. When safe places to park cash start paying well, money drains out of speculative things like crypto and into bonds and savings. Bitcoin pays no yield of its own, so a high "risk-free" rate raises the cost of simply holding it. Rate cuts usually push the other way and are friendlier to crypto.
📊 In 2022 the Fed hiked aggressively, including three back-to-back 0.75-point increases. Over the same stretch Bitcoin slid from around $47,000 in March to under $20,000 by June, part of a roughly 70% drop from its late-2021 peak. Altcoins tend to swing even harder than Bitcoin. (Figures are approximate.)
🧮 Crypto has its own rates too
Lending protocols set rates that have nothing to do with any central bank. On DeFi platforms like Aave and Compound, the rate is variable and set automatically by supply and demand in a lending pool: when borrowers outnumber lenders, the rate climbs. This is where most beginners first meet an interest rate in crypto — as the APY shown for lending out a stablecoin, or the borrow rate on a crypto-backed loan.
🚨 Things beginners should know
- 🔁 Rate vs APY — A plain rate applies once; APY adds compounding, so it always reads higher. Compare like with like.
- 🌊 Crypto rates float — DeFi yields move with pool supply and demand and can shrink fast. They are not a fixed bank rate.
- 🌍 Macro matters — A central-bank rate decision can move crypto prices even though it has nothing to do with crypto itself.
- 🚫 Beware guaranteed yield — Any platform promising a fixed, unusually high return should be treated with serious suspicion.
❓ FAQ
- Is the interest rate the same as APY?
- No. A simple interest rate applies a flat percentage to your money once. APY (Annual Percentage Yield) folds in compounding, where your earnings get reinvested and earn more, so APY is always equal to or higher than the plain rate. Crypto platforms usually advertise APY, which looks bigger than the underlying rate.
- Why do crypto prices drop when central banks raise rates?
- When safe savings and bonds pay more, money tends to move out of risky assets like crypto and into that safer yield. Bitcoin pays no yield of its own, so higher 'risk-free' rates raise the cost of just holding it. Rate cuts tend to do the opposite and are usually friendlier to crypto.
- Are the interest rates on crypto lending platforms fixed?
- Usually not. DeFi lending rates on protocols like Aave and Compound are variable and set automatically by supply and demand in a lending pool: more borrowers than lenders pushes the rate up. Any percentage shown can change quickly, and yields advertised as fixed or guaranteed should be treated with suspicion.