It might be hard to believe after the crypto winter of 2022, but monetary tightening by global central banks could be supportive of bitcoin upside.
That’s the take of BitMEX co-founder Arthur Hayes. In a recent blog post, Hayes offfered the opinion that central banks, including the Federal Reserve, are using blunt tools for situations that likely require more nuance and a gentler touch. That could bode well for bitcoin and assets such as the Invesco Alerian Galaxy Crypto Economy ETF (SATO).
“Central banks and governments are flailing about trying to use the economic theories of yesteryear to combat the novel situations of the present,” opined Hayes. “Conventional economics says, as the Fed raised rates, growth in a very credit-sensitive economy would falter.”
Among equity-based crypto exchange traded funds, SATO is one of the most levered to digital currencies’ price action. This is because it’s primarily comprised of crypto miners. In other words, policies that benefit bitcoin, be they monetary or otherwise, can be a boon for SATO holdings.
High Rate Recipe for Bitcoin Upside
Hayes laid out an easy-to-understand case regarding why higher interest rates could boost bitcoin.
“Rising deficits must be funded by selling more and more bonds. By the end of the year, the US Treasury must sell an additional $1.85 trillion worth of bonds to repay old debt and cover the budget deficit. And in addition to having to issue these bonds, the Fed is raising rates – which in turn increases the amount of interest the US Treasury must pay,” he noted.
Higher deficits force the government to sell higher yielding bonds to erase older debt. This is pertinent in the U.S. because those deficits continue rising. That means investors are compensated to a greater to degree to hold Treasurys.
“To sum up: when rates rise, the government increases interest payments to the rich, the rich spend more on services, and GDP pumps even more,” added Hayes.
So the Fed continues relying on interest rate hikes to damp inflation. Meanwhile, buyers of newly issued Treasurys potentially benefit by way of higher yields. That juiced income could be fuel for risk assets, including bitcoin.
The point about inflation and rising rates is relevant. The August reading of the Consumer Price Index (CPI) was disappointing. The CPI rose 0.6% last month, notching its biggest increase of 2023., Meanwhile, the year-over-year jump of 3.7% was ahead of economists’ expectations.
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