It could be said that bitcoin was born in an era of low interest rates. The world’s first decentralized digital currency was first mined and traded in 2009, at a time when central banks were using unprecedented stimulus in an effort to keep borrowing costs minimal. Following the financial crisis, these institutions cut their benchmark rates close to zero and engaged in asset-purchase programs in an effort to meet this objective. Interest rates dropped sharply because of these efforts, and as a response, investors began reassessing available opportunities considering the low-yield environment. What did this mean for bitcoin? For one, investors found the digital currency more compelling since the opportunity cost of foregoing interest-rate payments was lower. In this low-rate environment, one could argue that investors saw bitcoin as having similar incentives to other safe haven assets, for example bonds. As long as the interest payments provided by these safe assets were modest, investors had little reason to seek them out over bitcoin. However, should borrowing costs push higher, the digital currency could lose some of its luster. If interest rates start rising, it could draw many investors away from bitcoin and into interest-bearing assets like bonds. While the global economy has enjoyed a drawn-out period of low interest rates, this situation might change soon, several experts told CoinDesk. Since bitcoin doesn’t provide investors with interest payments, rising interest rates could make the digital currency less appealing to market participants. Bitcoin’s supply changes only very gradually, and therefore any reduction in demand could prove bearish for prices. Rising rates a surprise Any such change in the interest-rate environment would come as a surprise to many, said Robert Johnson, president and CEO of The American College of Financial Services. Borrowing costs have fallen to record lows after enjoying a steady, […]
