Why Bitcoin's Latest Rally May Have More to Do with the Fed's Monetary Policy
Bitcoin is back in the headlines once again after the cryptocurrency saw another big jump on Tuesday, topping $30,000 for the first time since June. Some pundits attribute the surge to various reasons, such as PayPal's recent move to allow buying and selling of cryptocurrencies to their United States customers or the current bank run of Silvergate Capital. However, many experts believe it could be more about the United States central bank's monetary policy and the downside of massive money printing. Let's look closer at why the Fed's decisions have become so critical and why Bitcoin may benefit from it.
The Federal Reserve is a government agency whose primary responsibility is stabilizing the country's economy through monetary policy. The U.S. dollar has decreased purchasing power by 86% in the last 50 years since 1972. When the economy is on the verge of recession, the Federal Reserve usually lowers interest rates to stimulate economic growth. Conversely, when the economy begins to overheat, the Fed usually raises interest rates to slow it down.
Crypto asset prices sunk a year ago as the central bank started raising rates, but there is a chance the trend may reverse. Since Fed officials have suggested the opposite, the market has responded positively, recently setting off a big rally. Investors are betting that the Fed will soon pause its rate hikes in 2024, even though the evidence seems to point to the contrary. Bitcoin and other cryptocurrencies thrive in a low-interest-rate environment, incentivizing investors to seek higher returns in riskier assets.
Furthermore, industry advocates see the Bitcoin rally as a sign that investors are converting some of their cash into digital currencies to hedge against inflation. The fear that the government's monetary-fiscal policy could devalue currency has led some retail and institutional investors to pour cash into Bitcoin. The looming fear of central bank digital currencies and the FedNow instant payment banking application is pushing more people to onboard into Bitcoin. Bitcoin is known for its limited supply, which means there can only be 21 million Bitcoin, unlike fiat currencies. As such, some investors view Bitcoin as digital gold that helps them preserve their wealth.
In conclusion, Bitcoin's latest rally may be more about the U.S. Federal Reserve's monetary policy than any other variable. The low-interest-rate environment has incentivized risk-taking, leading to a significant rally in Bitcoin's price over the past month. Though there is little evidence to suggest investors are converting cash directly into digital currencies, the recent Bitcoin rally serves as a reminder of the appeal of cryptocurrencies to investors as a hedge against inflation. As policymakers grapple with how best to respond to rising inflation, Bitcoin could continue flourishing in the years ahead.