The Federal Reserve raised interest rates by 25 basis points Wednesday, March 21, 2018, taking the benchmark funds rate from a target of 1.5 percent to 1.75 percent. This was the first rate hike under the chairmanship of the new governor, Jerome Powell, who was handpicked by President Trump. The rise in interest rates will increase short-term lending rates for American consumers, but it remains to be seen whether the price of bitcoin, too, will be affected or not.
Economists and financial analysts across Wall Street began analysing what the impact of a rate hike could be on gold and, interestingly, bitcoin. Gold prices have been trading flat since the last year. The precious metal is seen as a safe bet in times of crisis or economic panic and a rise in interest rates indicates strengthening of the economy. A strong economic forecast spells bad news for gold prices.
However, David Johnson, Latium’s CEO, reckons gold will benefit from the Fed’s recent move and bitcoin will continue to climb higher, telling Forbes:
“Gold should continue to move up due to risk aversion from capital markets and diminishing global stimulus. Bitcoin should to move up due to increased clarity from regulators as it moves into a more defined asset class.”
Bitcoin Has Been Booming Amidst Global Downturn
Bitcoin had a tremendous rise in 2017 and hit an all-time high above $19,000 in December 2017. But, since then, cryptocurrency prices have entered a bearish region with bitcoin struggling to break above the $10,000 mark. It recently even fell to the low $6000s before finding strong lower resistance at above $8000. The question now is whether a rise in interest rates could deter investors from investing in cryptocurrencies. There is, however, no clear answer on the topic. The yield on the ten-year U.S. Treasury bond has risen to 2.83 percent, while it is at 2.03 percent for the shorter one-year treasury bond.
Another important point is that bitcoin was launched in 2009, a mere year after the 2008 global economic crisis. Central banks had been forced to lower interest rates to near zero levels, and equity markets had suffered a rout not seen since the Great Depression of 1930. The financial crisis was felt heavily in some countries, forcing some of them to the brink of complete economic turmoil. Greece defaulted on its interest payments to the World Bank and with no bailout package in sight, the government decided to impose daily currency withdrawal restrictions on its citizens.
This incident proved to be a boon for cryptocurrencies as they were decentralized and beyond the legal scope of any global financial authority. People began to view bitcoin, which portrayed itself as the first globalized decentralized cryptocurrency, as a currency of the future. The majority of investor money that would have been poured into the equity and bond market entered the still-nascent bitcoin industry.
Merchants began accepting bitcoin as a payment method and on May 22, 2010, Laszlo Hanyecz paid 10,000 bitcoin for two pizzas. But, it was the 2017 price rally that brought bitcoin to the attention of the world.
Fed Delivers Sixth Rate Hike Since 2009
The recent rate hike is the sixth since 2009. Jerome Powell has promised that there could be more on the way depending on the economic growth outlook. Forbes contributor Panos Mourdoukoutas argued in October 2017 that an end to the era of ‘easy money’ could take wind out of bitcoin’s phenomenal rise. Extra market liquidity resulting from the low-interest rate environment has been a driver of money going into bitcoin, according to some analysts.
Bitcoin is still seen majorly as an investment and not a currency. Critics have argued that it has no intrinsic value and is too volatile to be used as a benchmark, volatile currency. Nevertheless, people have been using credit cards and taking on debt to get a position in cryptocurrencies, as BTCManager has reported in the past. Higher interest rates will begin to deter such behavior.
The heads of central banks at the G20 summit also spoke about the need to regulate the cryptocurrency market, but later dismissed the notion after stating that it posed no major risk at this time. For now, there is no established study or research to indicate a relationship between bitcoin and interest rates. Many commentators, such as BitMEX’s Arthur Hayes, maintain that the cryptocurrency marches to its own tune, saying in the short-term, “Bitcoin will move on its idiosyncratic factors.”
Bitcoin’s own monetary policy, in contrast to that of the U.S. and most nation states, is a rules-based approach rather than discretionary. Bitcoin’s next halving in 2020 will cut the block reward for miners from 12.5 to 6.25, leading to a reduction in the rate of new bitcoin issued.