Will an Interest Rate Cut push investors into Bitcoin?
A Fed rate cut would not only help to stabilize the stock market but could also lead to new money flowing into Bitcoin ahead of the halving.
The first cut is the cheapest
In light of a predicted pullback in the global economy and a correcting stock market, the Federal Reserve is poised to cut interest rates at the next FOMC meeting.
The S&P 500, which measures the price performance of the 500 largest US companies, is down by over 12 percent since its most recent high of $3,386 two weeks ago. Additionally, the index experienced its worst week since the Great Financial Crisis at the end of February.
Conversely, the 10-year US Treasuries are trading at all-time low yields, which means that there was a flight to safety out of stocks into safe haven assets following the Center for Disease Control and Prevention (CDC) warning about the potential impact of the coronavirus.
“It’s not a question of if this will happen but when this will happen and how many people in this country will have severe illnesses. [...] Disruption to everyday life might be severe,” said Nancy Messonnier, a CDC official.
“Everyone’s” favorite safe haven asset gold (XAU) spiked briefly to a seven-year high of $1,665 on February 24, before trading down again to $1,592. Year-to-date, gold is up by five percent.
Interestingly, while bitcoin (BTC) is often touted as a safe haven asset akin to gold, the price of bitcoin correlated with risky assets in the past two weeks and dropped by around 14 percent to trade just under $9,000 at the time of writing.
A rate cut by the Fed could move investors away from low-yielding, low-risk assets back to “risky” assets as the risk-reward ratio would look more enticing again. Despite bitcoin’s safe haven attributes, the digital currency can still be classified as a risky asset. At least, judging by its most recent correlation with stocks.
Therefore, a Fed rate cut could push returns-hungry investors into BTC.
Halving or haven?
Since the start of the year, the value of Bitcoin has gone up by over 20 percent. Pundits have largely attributed this rally to investors positioning themselves ahead of the upcoming Bitcoin block reward halving, which has historically always led to substantial market rallies as a result of a slowdown in supply.
Additionally, some believe that the rally has also been driven by the demand for a safe haven asset that is uncorrelated to stocks and bonds.
While it is impossible to determine investor’s motives for buying bitcoin, what is clear is that bitcoin is back in vogue in 2020.
How the effects of the global coronavirus epidemic will play out in the crypto markets remains to be seen but as digital gold and as an alternative currency, bitcoin looks well-positioned to withstand the potential storm ahead.
Moreover, if the Fed decides to cut rates on March 18, we could see new money flowing in the world’s leading digital currency.
OhNoCrypto
via https://www.ohnocrypto.com
, Khareem Sudlow