How Do Interest Rates Affect Bitcoin? Why They May Be a Damper for Crypto Going Forward
How do interest rates affect Bitcoin? You may not like the answer, as I will tell you right here on this blog post that a few things are good for Bitcoin, and that is high stock prices, an unstable economy, global turmoil, low interest rates and even in some cases, by many contradictions, low stock prices! What we find is that Interest Rates have something of a negative impact on stock prices, much like they would have a negative affect on Bitcoins. There is just one major reason for this, unlike the three big reasons that increased rates affect stock prices, and that is because money will fly out of Bitcoin as a new, less risky asset, gives a higher rate of return. If I have $50,000 in Bitcoin, and Interest Rates are at 0% or 0.25% or 0.5%, I am very likely to keep the money in Crypto, as I am losing a huge chunk of money due to inflation if I keep the money in cash or cash equivalents. However, if all of a sudden I can get like 2% or 3% in a Treasury Bill, and the rise in Interest Rates brings Inflation down from 7% to like 4%, now I can combat Inflation by literally just holding my assets in Risk Free cash, which is much more attractive to me than putting my capital into a risky asset like Bitcoin or even the stock market. The other two reasons for Interest Rates dropping the equity market that are not true for Bitcoin include:
The Cost of Borrowing Increases – For the stock market, where we have actual companies that generate actual revenues, the lower their cost of borrowing is, the more they can use it to leverage their company via the use of cheap debt. The cheaper the debt, the more the arbitrage profits, and the higher both their earnings, and their ability to scale their business is.
The Rate at Which Future Cash Flows Are Discounted Is Increased, Leading to Lower Present Values and Lower Stock Prices In The Equity Markets – How do you find the price of a stock, and therefore the current value of a company in the stock market? You discount future cash flows at the discount rate, which can be the Risk Free Rate, the Cost of Borrowing, or, if we want to get super academic, the Weighted Average Cost of Capital. If the discount rate is higher, the rate at which we reduce those cash flows becomes higher, which means that they are reduced more, which means that they become lower. This lowers of market prices of stocks and both brings them down, and keeps them down for longer periods of time. Interest rates are like having weights on your ankles with regards to the stock market. The one benefit that they do have is that they reduce inflation significantly, which helps stocks, the United States, and Real Rates of Return over the long run. Be sure to read on or subscribe to our blog for additional details and information! Other Crypto Currencies that Interest Rates can affect include:
Crypto Index Funds
The Stock Market
The Over the Counter Market
Margin Borrowing Costs
And much more. Read on or subscribe to our blog for additional details and information.
How Do Interest Rates Affect Bitcoin? They Make The Coin Cheaper, Could This Be Why Institutions Are Buying In?
Okay so we have established that Interest rates affect Bitcoin largely by acting as a headwind and by undervaluing the entire Crypto Currency asset class. The primary reason for this being, once again, that interest rate increases make an asset class more attractive to retail and institutional investors, and as a result make it more likely that assets will fly out of Bitcoin and into something safer like Bonds, CDs or Cash Equivalents. Except that isn’t what’s happening here, and in fact massive firms like Bridgewater Associates, O’Leary Funds, Morgan, and a host of others, are putting money into Bitcoin, and more specifically GBTC, the Greyscale Bitcoin Investment Trust, as they try to time the market with it. It is currently very undervalued, or so every single banking analyst says, and it doesn’t even look like it has necessarily corrected for the fact that all of this new institutional money is flooding into the currency. I am going to be putting as much money from my Roth IRA into the GBTC trust as humanly possible, if it moves up to $70,000 or $75,000 a coin by the end of the year, I am going to jump for joy as $12,600 becomes more like $30,000+ and then on to $40,000 in my Roth IRA at the start of 2023, fingers crossed that this works.
Why Are Multiple Institutions Buying Into the Grayscale Bitcoin Trust?
I think that with government regulation starting to kick in on the Crypto markets, as well as the self fulfilling prophecy that is institutional money flowing into Crypto Assets, combined with extremely high rates of Inflation in the United States and Globally, has actually created a massive arbitrage opportunity for Bitcoin to grow a massive amount by end of year. I have actually never seen the market at such a ripe position where Bitcoin can flourish, and I think that every single person who says Bitcoin will almost always end badly is going to be proven dead wrong, as they stand with their pants around their ankles, and Bitcoin eventually hits a $555,000 valuation in the next 10-20 years, nuff said.
Final Thoughts On How Do Interest Rates Affect Bitcoin? And Why I Am Seriously Considering Buying Up A Position
And so the gist is that Interest Rates typically make Bitcoin cheaper. Which in this case appears to mean that the Greyscale Bitcoin Trust and Bitcoin on its own are significantly undervalued, which means that we have a fantastic arbitrage buying opportunity on the market right now to the tune of 100% or 200% gains being possible. I will post back and update this article at the end of the year with my thoughts on this, as I hope I am very much right! Read on or subscribe to our blog for additional details and information.
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