The BitMEX co-founder claimed that the price of Bitcoin could increase in case central banks globally continue restricting monetary guidelines.
In a blog post, Arthur Hayes, a popular macro-analyst, opposed the conventional wisdom concerning Bitcoin’s link to interest rates. He claimed this traditional economic reasoning would collapse under the United States’ excessive debt amount.
Measures to Control Inflation
On Monday, he wrote that central governments and banks are flailing about attempting to utilize past economic theories to fight the present novel situations. Since 2022, the Federal Reserve has increased its benchmark rate from 0.25% to 5.25% as it seeks to reduce inflation to 2%.
Despite its efforts proving to be successful, Hayes believes that in the future, inflation might be ‘sticky’ since nominal gross domestic product (GDP) growth surpasses government bond yields.
Based on the Atlanta Fed’s GDPNow forecast data, Hayes’ estimates show that nominal GDP growth for the third quarter remains at an ‘astonishingly massive’ 9.4%. Additionally, the 2-year United States treasury yield is just 5%.
Hayes argued that based on conventional economics, the rise in rates by the Fed would weaken growth in an extremely sensitive economy. This was true for financial asset markets such as Bitcoin and stocks that fell in 2022 and eliminated capital gains tax receipts.
At the same time, reduced tax income meant increased government shortfalls that should be funded through the sale of additional bonds to pay old debts. For the United States government, it entails additional interest payments to the country’s rich bondholders, worsened by the increased yield on these kinds of bonds in a high-rate environment.
Furthermore, an increase in rates results in the government increasing interest payments to the rich. The wealthy use more on services, and the gross domestic product pumps more.
Hayes believes that with the economy’s continued expansion at a quicker rate than the government will pay out through its debt, bondholders might search for yield in more gratifying ‘risk assets such as Bitcoin. The affinity to embrace the risky assets yields higher investment numbers for crypto assets and derivative products.
Impact of Increasing Interest Rates
In his admission, Hayes anticipates that Bitcoin would win amid a tightening Fed whose tactics might unintentionally result in an increased supply of money. He noted that if the Fed was certain that eliminating inflation should involve increasing interest rates and reducing the balance sheet size, then it was doing something that would hurt people.
Analysts believe reduced rates are the most appropriate for Bitcoin as well as other risk
assets. This is because cheap money creates an opportunity for investors to postulate for possibly greater returns. A report by Coinbase analysts in June showed that Bitcoin’s 4-year cycles might be due to a reduced-rate central bank policy.
Hayes does not disregard the positive impacts of reduced rates on the price of Bitcoin by reporting the asset’s link to the central bank policy as an ‘excellent convex association.’ He concluded by claiming that at the extremes, things become nonlinear and occasionally binary. The United States, as well as the international economy, is at an extreme.
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