Following the World Health Organization’s (WHO) declaration of a pandemic in March, central banks have continued to maintain near-zero interest rates. Analysts argue the rate cuts have not been “natural,” and over the long-term, some investors say it could positively affect Bitcoin.
Moberg cited the work of Swedish economist Knut Wicksell, who created the concept of the “natural rate,” to state that “there is nothing natural about the fall in rates that we have seen in much of the developed world since the 1980s.”
“(1) the rate of interest that equates saving with investment; (2) the marginal productivity of capital; and (3) the rate of interest that is consistent with aggregate price stability.”
However, Moberg pinpointed the U.S. has seen rate cuts in every stock market crash since 1987. Hence, rather than adjusting rates to ensure the long-term stability of the monetary system, major central banks and economies dropped rates to reactively deal with various crises.
Jones emphasized that Bitcoin reminds him of gold, the go-to safe-haven asset for hundreds of years. He said:
“I am not a hard-money nor a crypto nut. The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by Covid-19. Bitcoin reminds me of gold when I first got into the business in 1976.”
Low-interest rates and inflation typically have an inverse correlation because individuals and companies can borrow more cash at lower rates. This causes the economy to expand and the price of goods and services to rise over time, leading to inflation.
Inflation could further buoy the sentiment around Bitcoin because it causes the value of the economy’s underlying currency to decline. As such, inflation often leads safe-haven assets to outperform national currencies.
Whether the price of Bitcoin has been increasing as a result of investors considering Bitcoin as a potential hedge against inflation is debatable according to Bitfinex’s Chief Technology Officer Paolo Ardoino, who told Reuters that high-frequency trading firms trade “anything” and are not concerned about an asset’s underlying philosophy.
In an article about the practicality of Bitcoin as an inflation hedge, Ardoino stated:
“You have high-frequency trading firms that trade on the scent of the spread to make money. Whether it’s milk or potatoes or bitcoin, they would trade anything - so they really don’t care about the philosophical point of view.”
Some high-profile investors believe Bitcoin is evolving into a safe-haven asset and in the long term, low-interest rates could boost Bitcoin. But as Ardoino said, for now, professional traders are not primarily driven by the appeal of Bitcoin as a hedge against inflation. Based on futures and options volume, large high-frequency traders likely account for most major market movements.