Several market participants now expect the U.S. Federal Reserve to cut interest rates by the end of the summer. The interaction between the Federal Reserve and Bitcoin BTC’s monetary policy is interesting and much deeper than just an “inflation hedging” story. How could Bitcoin be affected by changes in the rate environment?
In the past, Bitcoin has shown a correlation with the stock market and, along with stocks, has had a negative price reaction to interest rates rising in line with inflation. Effective March 16, 2022, the Federal Reserve has lifted its zero interest rate policy. From 2022 to 2023, the Fed rapidly raised its target range for policy rates, and by July 23, 2023, policy rates were in their current range of 5.25% to 5.50%. During this period, Bitcoin will trade in a depressed range relative to its highs, but it will gradually break out of the lows of around 15,000 after the FTX news was announced and drop to around 30,000 during the Fed's last rate hike. The recovery rate rose to a lukewarm level. .
Bitcoin once really expanded under the cover of zero interest rate policy and small rate hikes before rushing to curb inflation in 2022. COVID-19 and the resulting panic have ensured that interest rate targets will remain near zero throughout the acute phase of the pandemic, and even though there have been unsuccessful attempts, the Bitcoin space has We were able to continue to grow in a low interest rate environment. Raise interest rates again before the pandemic. When I wrote about this at the time, the conclusion that short-term price movements were tilted to the downside but long-term potential rang true.
There are always many factors involved in Bitcoin pricing. Typically, major events are intertwined, such as adoption by a nation-state, approval of the ETF, ban from the nation-state, and failure of an exchange or third-party custodian service. There is always a tension between demand and supply. In peer-to-peer markets, there are not necessarily external forces supporting the system. There may be large buyers, such as countries or U.S.-listed companies, but they are not tied to Bitcoin any more than they believe in its mechanics and reliability.
This is the opposite of the world of fiat currencies. For example, the ECB buys up large amounts of European government debt, but it is estimated that by 2022, the eurozone's debt will be “only 40%”. In the fiat world, there are many forced buyers, but few forced sellers. With Bitcoin, the opposite is true. Although no one is obligated to buy Bitcoin, there have been bankruptcies of leveraged services such as Celsius and BlockFi that have forced them to become sellers. That may be the reason behind some ETF outflows and some downward pressure on the balance of Bitcoin prices.
When the Fed lowers interest rates, it affects this existing supply and demand dynamic. The Fed will also set an example for central banks around the world. Central bank bond purchases and low interest rate targets are meant to force people to buy leverage and debt. Risk-on assets such as stocks will likely thrive, but the AI hype driving them may come to an end at some point given the returns generated and the amount invested in infrastructure (even though the market may last “irrationally'' longer than you (and can of course remain liquid). Given its correlation with stocks, Bitcoin could rise as well. It could also provide an easy way for people to get in and out of stocks now that ETFs are mainstream, perhaps leading to stronger correlations with stocks and fast-growing tech stocks.
Bitcoin has a lot of volatility caused by the system itself. The consequences of the halving will be seen – if history repeats itself, we would typically expect a price increase 6-18 months after the halving itself (hardly a reliable indicator for Bitcoin, but probably It is a directional lens). And there are always ticking time bombs and windfalls lurking. Perhaps one or two exchanges or leveraged services will fail. Despite what models say about power laws, the laws of nature that make Bitcoin deterministic, markets do indeed operate in a way that often defies accurate predictions.
However, the possibility of multiple rate cuts could create a favorable environment for prices, perhaps a different price point than the current environment where rapid rate hikes and multiple ETF approvals are driving much of the price movement. may be brought about. In the short term, rate cuts are likely to help all risk-on assets, including Bitcoin. Also, in the long run, we will be contrasting and comparing the Bitcoin model with the fiat currency model. Central banks' tendency to lower interest rates and inflate the money supply at the first sign of real economic trouble will prove why we need a decentralized currency that is not arbitrary but scarce. An order to serve the few will benefit the many.
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