During the peak of most bull runs, the oft-repeated mantra "This Time Is Different" can be heard. This is what investors and the crowd in a mania often tell themselves why any boom or bubble will not burst and a new wave of prosperity will stay forever.
However, will the next bull run be different?
If we look at the history of Bitcoin, it has only ever existed in an ultra-low interest-rate environment.
Here you can see that the highest interest rates that we have had were a short rise up to 2,5% and then quickly back down to 0% again. Our current rates are the highest since pre-bitcoin times.
The Fed has also indicated that it is not done yet with interest rate rises and therefore we can expect them to continue for next year. What could this mean for crypto markets and a higher inflationary market?
With higher interest rates to borrow money, there could be less speculation and less growth in crypto assets. Crypto seems highly correlated to tech stocks and this is a market that has had a great performance in a low interest-rate environment and is also suffering.
As an example, we can see that the costs of borrowing $10k at 2% and now 4% have meant a more than 100% increase in the interest rate payment.
If interest rates for borrowing go to 6%, that would be a 300% increase in the interest payments.
This may seem negative for the price of crypto and if interest rates remain at these levels or higher, we will be in new territory. Will this have a negative impact on the next bull run?
On the flip side, we are also likely to be facing a much higher inflationary action in which, crypto priced in fiat could propel prices much higher.
In the last two years, the Fed has doubled its balance sheet and I believe this inflationary crisis is the perfect cover for a further monetary stimulus that needs to come for it to double or more again.
Usually a good measure for the health of the economy, you can see with the total assets of the commercial banks, the negative numbers from the aftermath of the last great financial crisis of 2007-08.
You can also see the huge lending peak caused by the insecurity when the corona crisis broke out. How will these charts look going forward and affect the crypto market?
With higher interest rates, there will now be a bigger incentive for people to hold fiat as they will now for the first time in ages, get a positive return on their savings. Will people be interested to hold crypto?
The trick going forward will be how will the banks massively inflate the fiat money supply with higher interest rates. This is because consumers will be less inclined to borrow money at higher rates unless they can make a good carry trade like with the Turkish Lira.
So far the tricks used have been to artificially fix prices higher and then effectively give people money as "government help programs" for these price increases which works then as a double-spending effectively increasing inflation further.
Therefore it seems quite clear that higher inflation and rates are wanted and this is part of the cost of living crisis agenda being played out. With a very inflationary environment, why is it that we are not seeing crypto increasing against fiat?
Is the power of higher interest rates the main factor?
Thanks for reading.
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