The US Federal Reserve is expected to cut the target interest rate on Wednesday for the first time since the global financial crisis a decade ago. This policy shift is gasoline for bitcoin. To cut rates, the Fed will increase the supply of US dollars,…
To cut rates, the Fed will increase the supply of US dollars, thus cannibalizing its value.
It’s a stark reminder that fiat money can be manipulated at will by central banks. Bitcoin cannot. Bitcoin’s total supply is hard-capped and will never increase.
While the Fed prepares to flood the market with more dollars, bitcoin is about to get more scarce with the upcoming halving in 2020. The flight to bitcoin in this scenario feels almost inevitable. Here are three reasons why.
Low interest rates are designed to encourage spending and investing, not saving.
Think about it like this. The best savings accounts in the US only offer ~1.9 percent interest. If the Fed cuts, you can expect that to go lower.
At the same time, the Fed targets a 2 percent inflation rate. So your savings are growing slower than everything else around you. You’re losing money in a low-interest-rate environment. Look at this chart from JP Morgan’s private bank which shows the long-term decline of the dollar’s value.
Bitcoin is different. Bitcoin rewards saving because its supply cannot be diluted. No central authority can devalue BTC; its value is solely determined by demand. Over the long-term, this has played out in a steadily rising return for bitcoin holders.
Cutting rates is designed to encourage investors to put their money in the market. But after a decade of low interest rates, it’s not easy to find a good return.
Investors will start to look elsewhere to put their money. And it’s getting harder to ignore the best performing asset of the decade, bitcoin. In the absence of traditional yields, investors will cautiously start allocating to bitcoin.
Today’s rate cut is a good time to think about the broader economics of fiat money. Is endlessly printing money a wise decision? China, Europe, Japan, and the US are all easing monetary policy in a race to stay competitive on the global arena.
It might temporarily boost stock markets. But the average person putting their hard-earned money in a savings account is getting screwed.
Bitcoin may not be perfect, but it’s an alternative.
Bitcoin’s supply can’t be manipulated or expanded at will. It can’t be used for global power games. The supply is hard-limited at 21 million. No more will ever be created or “printed.”
Bitcoin’s daily supply is programmed and kept in check by an evolving “difficulty” algorithm. The output is predictable and impossible to manipulate.
Bitcoin is a scarce asset while the dollar’s supply is abundant and ever-growing. Supply and demand economics tells us scarcity is more valuable than abundance.
To put this in perspective, bitcoin will cut its daily supply in half in May 2020. It’s about to get more scarce. At the same time, the Fed is about to flood the market with dollars. Which would you rather be holding?
Last modified: January 11, 2020 2:29 PM UTC