Arthur Hayes believes rising central bank rates might boost Bitcoin, challenging traditional economic views on interest and cryptocurrency.
Arthur Hayes, BitMEX’s co-founder, challenges the typical beliefs about Bitcoin and interest rates. As central banks globally adopt stricter monetary policies, Bitcoin’s price might benefit. This perspective contrasts with the dominant view that sees rising rates negatively affecting Bitcoin.
Hayes contends that the U.S. government’s staggering debt will dismantle traditional economic theories. Central banks and their attempts to apply outdated economic principles to current challenges aren’t effective. This became evident when the Federal Reserve upped its benchmark rate from 0.25% to 5.25% within a year. The move aimed to curb inflation to 2%, and while it showed results, Hayes anticipates future complications. Specifically, he believes that inflation may remain persistent, especially if nominal GDP growth surpasses government bond yields.
Government Debt and Bitcoin’s Potential Growth
Diving into numbers, data from the Atlanta Fed’s GDPNow forecast indicates a staggering 9.4% nominal Q3 GDP growth. This figure stands in stark contrast to the 2-year US Treasury yield at just 5%. Hayes points out the expected outcome from a rise in the Fed rates. Historically, a hike in interest rates would undermine growth in economies heavily reliant on credit.
Indeed, 2022 witnessed this theory in action. Financial markets, including stocks and Bitcoin, saw a sharp decline, thereby reducing capital gains tax revenues for the government. The reduction in tax income, in turn, led to an increase in government deficits. To manage this, the government sells more bonds, essentially taking on new debt to pay off older liabilities. The direct consequence of this? The U.S. government finds itself making more interest payments to the country’s affluent bondholders. What’s more, the payouts increase due to the elevated yield on these bonds in an environment where rates are high.
Hayes simplifies this scenario: higher rates lead to more government interest payments to the wealthy. These affluent individuals then increase their spending on services, which further drives up the GDP. Hayes suggests that as long as the economy expands quicker than the government’s debt payouts, bondholders might turn to potentially lucrative “risk assets” like Bitcoin for better yields.
In a recent article, Hayes delved deeper into this notion. He posited that Bitcoin stands to gain amidst the Fed’s tightening measures, even if such approaches unintentionally expand the money supply. Hayes emphasized, “If the Fed is determined to combat inflation by both raising interest rates and shrinking its balance sheet, it’s inadvertently harming its own interests.”
Bitcoin and Central Bank Policies
Generally, experts associate lower rates with benefits for Bitcoin and similar risk assets. With affordable money available, investors have the flexibility to seek potentially greater returns. Coinbase analysts in a June report proposed that Bitcoin’s 4-year cycles might correlate with central bank policies that favor low rates.
Yet, Hayes doesn’t entirely dismiss the advantageous effects of reduced rates on Bitcoin’s valuation. He characterizes Bitcoin’s tie to central bank policies as having a “distinctly positive relation.” Hayes finishes with a striking observation, emphasizing that extreme situations, like the current global economy, make things non-linear, sometimes even binary.
The correlation between Bitcoin’s performance and central bank decisions is intricate and multifaceted. As central banks worldwide grapple with evolving economic landscapes, Bitcoin may see new heights, especially if Hayes’ predictions hold true.