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Why Near-Zero Interest Rates Matter for Bitcoin

2020.07.04 OKEx

The COVID-19 pandemic has triggered one of the most severe global economic downturns in decades. 

Policymakers around the world have taken broad measures to contain and limit the economic damage from the viral outbreak. These measures include cutting interest rates to ultra-low levels and implementing asset-purchase programs worth trillions of dollars. 

While such actions are expected to further inflate asset prices around the world, what does this mean for crypto assets like Bitcoin (BTC)? 

Fed rates to stay ultra-low until at least 2022

COVID-led economic uncertainties have pushed the United States Federal Reserve to once again jump aboard the bandwagon of offering near-zero interest rates. Two unscheduled rate cuts in March have slashed a total of 150 basis points, making the target range of the rate between 0%–0.25%. 

The moves saw the Fed rejoin its counterparts in the United Kingdom, the European Union and Japan as part of a globally coordinated action to cushion the negative economic impact from the coronavirus situation.

Federal Reserve officials also provided their interest rates outlook at its June policy meeting. The latest dot plot shows that 15 participants in the Federal Open Market Committee — the Fed’s committee tasked with overseeing open market operations — didn’t expect the U.S. central banking system to raise rates before 2022. Meanwhile, only two officials expected it to increase interest rates in 2022.

Dot plot illustrating that near-zero rates are expected to stay until 2022. Source: Bloomberg

Furthermore, Fed Chair Jerome Powell said in the June policy meeting statement:

"The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The joblessness situation in the U.S. could solidify the case of having near-zero rates in the coming two years. With the May unemployment rate sitting at 13.3%, which is slightly lower than the record high of 14.7% in April, traditional markets didn’t expect the number to return to pre-COVID levels anytime soon. The current job market is still very far away from the Fed’s target of having the economy "on track to achieve its maximum employment," according to the June policy statement. 

The Fed’s balance sheet is ballooning

On top of ultra-low interest rates, the resumption of the Federal Reserve’s asset-buying program is another key part of the overall package meant to support the financial markets — and it is not difficult to notice the U.S. central bank’s desperation in utilizing its balance sheet as its new monetary tool to provide liquidity:

  • On March 15, the Federal Reserve announced that it would commit to the purchase of at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities.
  • On March 23, the Fed made the program open-ended while stating that it will “purchase the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”
  • On June 15, the central bank unexpectedly said it would start to buy corporate bonds through the Secondary Market Corporate Credit Facility — the Fed’s special purpose vehicle to support the corporate bond market in response to COVID-19 — in order to boost market liquidity and available credit for large employers. 

With the new round of asset purchases, the Fed's balance sheet has ballooned from the pre-COVID levels of $4.1 million to over $7.1 million in mid-June.

The Fed’s balance sheet keeps ballooning. Source: Bloomberg

Bitcoin may benefit from central bank intervention

Interest rates are likely to remain at near-zero levels in the near future, and asset prices are expected to be boosted by asset-purchasing programs from not only the U.S. Federal Reserve but other major central banks, as well. This could potentially benefit crypto assets, such as Bitcoin, in multiple ways.

Snowballing asset prices

When new money keeps pumping into the system, it pushes investors to look for assets with higher yields in place of simply holding cash. This is because of the fact that the increase in the money supply devalues the currency and diminishes purchasing power. 

Equities and gold have historically been some of the beneficiaries of these easing narratives — and crypto assets like Bitcoin could be another asset to benefit from that.

Inflation vs. deflation

Unlike fiat currencies, which central banks can print at will, the Bitcoin supply is finite. This supply limitation gives the first and foremost cryptocurrency an anti-inflationary property that fiat currencies simply do not have. This makes BTC more similar to commodities like gold. 

Moreover, Bitcoin’s network is decentralized and offers greater protection to its users. 

These features, in part, make Bitcoin’s store-of-value narrative stronger — and post-COVID actions from global central banks may only strengthen this proposition.

CBDCs confirm Bitcoin is on the right track

Central bank digital currencies, known commonly as CBDCs, have become a major buzzword among not only blockchain- and crypto-watchers but also the traditional world of finance in recent months. 

China has been going full throttle when it comes to creating its own CBDC — the launch of which is reportedly on the horizon. Meanwhile, other countries and central banks have been playing catch-up

Both the increasing openness and attitude shift from policymakers point toward a more blockchain-friendly landscape — one in which Bitcoin shines as a decentralized alternative to the CBDCs, which co-opt its underlying technology.

Bitcoin’s narrative to be shaped by post-COVID economy

At a time when a potential second wave of the COVID-19 pandemic is threatening any economic recovery, central banks around the world — including the U.S. Federal Reserve — are expected to maintain their easing narratives and policies for an extended period. This could be one of the most important fundamental factors that shape the narrative for the broader digital asset market in the medium- and long-term perspective. 

While the financial markets will expect the U.S. to maintain near-zero interest rates in the coming two years, these expectations are also always subject to change. Because of this, both macro-watchers and Bitcoin traders will likely continue to pay close attention to the latest COVID-19 developments and the recovery of the real economy.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary

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