As a seasoned researcher with over two decades of experience in finance, I have witnessed numerous market fluctuations and economic cycles. The correlation between Bitcoin and interest rates is a fascinating development that has caught my attention.
Normally, an increase in fresh money supply aimed at reducing interest rates tends to boost the value of stocks (equities) and bonds with fixed payments (fixed-income bonds). This is because the excess money chases investment opportunities, causing prices to rise.
Ever since cryptocurrencies emerged, it has been observed that these digital assets tend to react strongly to changes in interest rates, and they typically move in the opposite direction (inverse correlation).
Correlation Spotted: Bitcoin and Interest Rates
According to a recent report from the Fidelity Active Investor Learning Center, certain crypto experts suggest that although central banks do not directly govern cryptocurrencies, there are indications that the U.S. Federal Reserve could exert an indirect impact on their prices.
Since May 2017, a SPGlobal report shows that approximately 63% of the time, the three-month rolling correlation between interest rates and the crypto index has been inversely related. This trend strengthened to about 75% of the time since May 2020. In simpler terms, when interest rates go up, the crypto index tends to decrease in around 63% to 75% of cases over these periods.
China, Canada, and South Africa on Brink of Rate Cuts
In 1971, when the United States stopped allowing dollars to be directly exchanged for gold, this action led to the establishment of a global foreign currency market characterized by fluctuating exchange rates that aren’t tied to any specific value.
Changes in this area significantly impact the profitability of importing and exporting goods, as well as the balance of trade between significant global trading nations. Consequently, the Federal Reserve’s decision to lower interest rates could create an opportunity for China to follow suit with their own rate reductions.
Watchers of the yuan anticipate a change in China’s monetary policy soon, given the tension between the US’s supportive stance on a Chinese interest rate reduction and the potential deflationary trend in the yuan that could lead to a downward spiral.
In a recent conversation, the Governor of the Bank of Canada, Tiff Macklem, mentioned that the bank stands prepared to make larger interest rate reductions than those implemented earlier in 2021.
This week, those following the South African currency are anticipating that the country’s Reserve Bank will make an announcement lowering the interest rate.
‘Soft Landing’ Could Boost ‘Hard’ Money Like Bitcoin
As monetary experts at the Federal Reserve and other central banks plan for a gentle economic touch-down, Bitcoin and other digital currencies show signs of infectious positivity.
According to Arthur Hayes, the founder of BitMEX and a significant figure in the cryptocurrency world, he believes that the Federal Reserve’s decision to restart interest rate reductions could significantly boost Bitcoin’s value.
He emphasized the monetary influence on BTC will materialize fast and that the results will be dramatic.
According to Hayes, they’re planning to significantly boost the production of money, which would cause inflation. While this might negatively impact some businesses, it could propel digital currencies such as Bitcoin rapidly upward, potentially leading them to soar high.
As a crypto investor, I recently decided to close my short Bitcoin position early this month, acknowledging that the profits I made were relatively small.
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2024-09-17 20:44