As much as Bitcoin is in its own bubble, it isn’t only the crypto market that has been suffering over the past few weeks: the outbreak of the COVID-19 coronavirus disease has caused mass panic and fear in real life, which has begun to roll over into the economy and asset markets.
As it is the mandate of central banks around the world to keep economies stable by keeping unemployment low and reducing inflation to a point where it is sustainable, Wall Street and the rest of the world is expecting interest rate cuts.
While such cuts are likely to help the entire economy, some expect it to especially help Bitcoin and other cryptocurrencies.
Goldman Sachs (And Other Analysts) Predict Interest Rate Cuts
Over the past two weeks, global asset markets have seen a steep decline across the board: the S&P 500 has fallen by over 12% since its all-time high set earlier this month, gold briefly fell under $1,600 after hitting $1,690 early last week, and crude oil has plunged.
The reason: investors expect economic data to be horrible for companies and countries alike due to the outbreak of COVID-19, which has started to shift the consumption habits of the public and has affected many companies.
According to a recent note from Goldman Sachs shared by Bloomberg editor Joe Weisenthal, these macro developments have forced the firm’s analysts to make a “further adjustment to our Fed call to project a 50bp (0.5%) rate cut by March 18 followed by another 50bp of easing in Q2.
Goldman Sachs also wrote that it expects similar interest rate cuts around the world, including cuts in Canada, the U.K., the European Union, and in India.
Goldman Sachs now calling for a 50bp cut by March 18 and another 50bps in Q2 pic.twitter.com/wOEUs6dmh2
— Joe Weisenthal (@TheStalwart) March 1, 2020
Goldman Sachs’ expectations have been echoed by the market, which is pricing in a near-100% probability that the Fed’s policy interest rate will fall 0.5%.
Why is Bitcoin & Crypto the Answer?
This expectation of lower rates comes as interest rates have already been the lowest they’ve been in literal centuries — in some countries, rates are even negative, meaning consumers need to pay banks for holding their money.
According to Travis Kling, the CIO of crypto fund Ikigai Asset Management, the drastically low rates and the large-scale asset purchasing (a.k.a. quantitative easing) being enforced by central banks are the “largest monetary experiment in human history.”
This is important because Kling says Bitcoin, due to its decentralized and scarce nature, benefits from central banker and governmental “irresponsibility”:
The increasingly erratic U.S. president is yelling at an irresponsible central bank to act even more irresponsibly with its monetary policy, while running a $1 trillion deficit for the second year in a row. Bitcoin is a risk asset right now, but it is a risk asset with a specific set of investment characteristics. The more irresponsible monetary and fiscal policies are, the more attractive those characteristics become.
This has been echoed by Chamath Palihapitiya, the Facebook executive-turned-venture capitalist and an early Bitcoin investor. The Silicon Valley executive said in December 2017 and other occasions that he thinks the cryptocurrency will reach a price of $1 million in the coming years.
While this may sound crazy, the investor cited reasons to back up this lofty prediction:
This is a fantastic fundamental hedge and store of value against autocratic regimes and banking infrastructure that we know is corrosive to how the world needs to work properly. ou cannot have central banks infinitely printing currency.
Like Kling, Palihapitiya is saying that the unorthodox policies being enforced by central banks, which many say equate to money printing, will force demand for scarce and anti-fragile assets, such as Bitcoin and gold, to increase.
Decentralized finance could also play a role in the coming shift from fiat to digital assets.
As can be seen in the table, users can earn an interest rate of anywhere from 0.26% to 12.91% a year (rates are variable) by lending stablecoins and even Ethereum to platforms like dYdX, Compound, or Dharma — rates much higher than what banks can offer.