The global economy faces a new series of extreme interest rate reductions, potentially driving the demand for more volatile crypto assets. With fiat assets racing toward lowered interest rates, crypto may also be seen as a store of value.
The US Federal Reserve has scheduled another interest rate correction for this Wednesday, in a bid to rein in the red-hot exchange rate of the dollar. A cheaper dollar means more competitive exports on the international market, but also a loss of dollar value for some traders and holders.
Since holding onto fiat would bear a penalty of very low to negative interest rates, some of the excess fiat may also flow into digital assets. The conditions of stagflation, where both the US Fed and the European Central Bank, among others, are racing to the bottom for extremely low-interest rates, may be ideal for crypto assets.
The Fed hiked the interest rate from 0.25% to 2.5% over the course of three years. Now, the central bank may start another series of downward hikes, as the rate is already 2.25%. US President Donald Trump is pushing for rates as low as possible, even going down to negative.
The ECB decided on a negative interest policy this September 12, citing Brexit and economic slowdown for its intervention. The ECB also injects liquidity through bond repurchases.
A stagnant economy plus high liquidity would also mean more free cash to invest. Instead of reining in liquidity, central banks continue the last decade of extreme quantitative easing. Money flows into assets that serve to preserve value or keep pace with the inflation – with gold once again becoming a hit, and real estate following close behind. Digital assets have some of the properties of gold as a store of value, and are more liquid than real estate.
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In 2019, Bitcoin (BTC) managed to appreciate more than 300% from its 2018 lows. Several rather liquid coins also achieved relatively high returns. Despite not setting records, the crypto market has regained its liquidity, and BTC looks more promising with wider adoption, higher trading liquidity, and stabilizing prices.
Do you think the impending global economic slowdown will turn people to crypto-assets? Let us know in the comments below.
Images via Shutterstock, Twitter: @bitdeezy
