Interest rates are rising for only the second time in 14 years since the US Federal Reserve cut the federal funds rate to 0% in response to the 2008 financial crisis and expanded its balance sheet via “quantitative easingwhich is doublespeak for money printing and treasury bill purchases.
The last attempt to raise the federal funds rate was from 2016 to 2018, which crashed and burned dramatically where a meager quarter-basis point increase from 2% to 2.25% led to the biggest one-day drop in stocks in US history on Christmas Eve 2018. The global economy before the pandemic was in a much better position in 2018 than it is today, but we have rates rising organically and rapidly in 2022 as the Federal Reserve attempts to finally cut cheap money and allow rates to ‘normalize’ once again. Mortgage rates hit an 11-12 year high in April 2022, and savings accounts are yielding again.
What impact will this dramatic reversal of the economic status quo have on the relatively new prices of digital currencies? Not much has changed in the 3.5 years since late 2018, when rates were 2.25% in terms of actual digital currency adoption. The primary use cases are still selling a token or JPEG NFT to a biggest fool who will pay an absurd price for it. What was the price of BTC in December 2018?
BTC was trading at an almost 4.5-year low around $3-4,000. the single thread “World Computer” Ethereum didn’t fare much better at around $130. Given that digital currencies have still failed to penetrate the real economy in terms of a mode of payment for real goods and services, I expect rising rates to have a similar negative impact. I don’t think prices will crash to these levels, but prices will likely continue to bleed.
As we emerge from the rigging of the global economy over the past two years by governments into the “new normal,” where stocks have (one way or another) soared to all-time highs during a pandemic and digital currencies have reached absurd valuations with NFTs minted above them, the at risk the markets return to the previous “normal”. Collectibles (TCG, LEGO, art) also had a similar boom which has now died down.
The “free tendiesThe 2020-2022 era is over and investors will now have to go back to looking for the expected annual returns before 2020 of 7-10%. You do not believe me ?
In a crazy inflationary environment where necessities like oil, gas, food and travel prices go to the moon instead of their token named food, who is going to buy and hold these highly speculative assets instead? Rising interest rates imply a risk-free environment where investors seek stable and strong returns in savings accounts, CDs and the traditional bond market. The market has already started pricing this.
Choose any digital currency and there is a good chance that its price will be down 20% since the start of the year, a bear market. US stock indices fell dramatically on 4/22 with the Fed hinting at a potential interest rate hike of 0.75 bps This year. While 1-2% doesn’t sound like much, many will even take a small, almost guaranteed rate of return as opposed to an extremely volatile asset, especially since rates are likely to rise. Plus, everything matters in large quantities, so large companies with billions under management will take this risk-free approach. This claim is not unprecedented, as almost the same change in behavior occurred just 3.5 years ago.
The digital currency space hasn’t changed enough since then to decouple enough to avoid a similar fate to stocks, especially since none of the coins are used enough in commerce to function like money. How can digital currencies reverse this trend? Quantitative easing via the Tetheral Reserve of course!
BTC Tetheral Reserve pic.twitter.com/X5ur5HpLsB
—Coinspeak (@coinspeak_io) May 14, 2020
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