Bitcoin in an Interest Rate Rising Environment
James Butterfill is Investment Strategist at major European digital asset investment firm CoinShares.____
Investors have spent the last 10 years, following unprecedented levels of quantitative easing (QE), expecting to see inflation begin to kick in, only for it not to happen. Perhaps one of the most plausible explanations is that the transmission mechanisms haven’t worked as expected, with QE often being used in an unproductive way, where companies have taken advantage of low bond yields for stock buybacks rather than growth initiatives. It has taken a world health crisis (COVID) to expose the threadbare global logistics network, highlighting significant supply bottlenecks that have helped push up inflation to levels not seen in the US since June 1982.
We have seen in the most recent FOMC minutes that the US Federal Reserve (Fed) is increasingly worried about the inflationary threat in the US, prompting them to consider ending the tapering of QE earlier than the markets expected while considering 4 interest rate hikes in 2022 rather than the consensus of only 2 around 6 months ago. This time it looks like the US Federal Reserve may well end tapering and hike interest rates again as they began to in 2015.
What will happen to Bitcoin (BTC) in a rate-rising environment? Bitcoin rose by 51% 6 months after the first rate hike in 2015, but we believe Bitcoin has matured significantly since then and is therefore likely to behave differently, and likely in line with other real (inflationary) assets. Therefore, analysis of how other real assets have behaved in previous rate hiking cycles is likely to give us some idea as to how Bitcoin may behave.
While every historical rate hike cycle is different in some way, similarities exist.
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