The Federal Reserve is not done with interest rate hikes, what does this mean for cryptocurrencies?

The Federal Reserve is not done with interest rate hikes, what does this mean for cryptocurrencies?

The year 2022 was unequivocally marked by the very high inflation that appeared all over the world. Even in Western countries, where inflation normally hovers around 2%, prices have risen by double digits. In response, central banks around the world have raised interest rates, and if the latest news is to be believed, they are far from over.

What does this mean for Bitcoin?

In short, higher government bond yields are a bad thing for bitcoin. Higher interest rates make it more difficult for individuals, companies and governments to raise new capital. Because the higher the interest, the more expensive it becomes to borrow money.

As a result, people and companies borrow less money, which means that less money enters the economy. This means that companies invest less and individuals ultimately consume less. As a result, fewer US dollars and euros are being circulated.

This reduces inflation and increases the relative scarcity of state resources. It’s just harder to get new fiat money. The main reason to invest in Bitcoin is the absolute scarcity of 21 million units. This scarcity is most attractive when interest rates are low.

When interest rates fluctuate around zero and individuals and businesses can borrow money at virtually no cost, the money supply will increase and inflation will rise. Money depreciates in value, making it more attractive to flee to riskier assets like bitcoin.

of climate change

In that respect, we can currently speak of real climate change in the financial world. Currently, you can get up to 5% interest on US Treasury bonds. This is very attractive to investors because the higher yield on government bonds is an almost guaranteed return.

After all, the US government has a monopoly on the money printing machine and will not go bankrupt any time soon. For this reason, especially in this uncertain climate, many investors are now choosing to put their money in safe government bonds instead of Bitcoin.

The image above shows the current interest rates on US Treasury bonds. The “US1M” is a 1-month US Treasury bond that will eventually be upgraded to a 30-year Treasury bond. As you can imagine, there are many investors willing to trade Bitcoin risk for this guaranteed return.

The downside of high interest rates

The danger of high interest rates is that they put pressure on the economy. Interest rates have remained almost continuously around zero for the past decade. This means that companies, individuals and governments can borrow at extremely low interest rates. The longer this takes, the more an economy becomes accustomed to low interest rates.

From March 2022 to today, interest rates have risen from that zero point to currently around 5%. The goal of the US Federal Reserve is to fight inflation with this policy.

US consumer price index. Source: tradeneconomics.com

They have done reasonably well so far, but inflation is still well above the target of 2.0%. In that respect, we are likely still dealing with high interest rates and the investment climate for Bitcoin is not favorable at the moment.

An additional danger lies in a recession, which can be caused by higher interest rates. If companies cannot manage their finances at current interest rates, this could lead to layoffs and a sharp rise in unemployment.

However, Neel Kashkari of the US Federal Reserve, among others, points out that interest rates may still have to rise somewhat. In that respect, we can say that a more than exciting moment is approaching for the financial markets and certainly for Bitcoin.

Source: Btc Direct

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