There are two sets of opinions about whether higher interest rates help or hurt crypto. These depend upon which camp you are in. Folks in the crypto world note that higher rates and the difficulty the US has in paying its debts will make the dollar weaker. That will make Bitcoin and the rest stronger. Folks in the banking part of traditional finance note that when interest rates go up, currencies get stronger.The dollar goes up while Bitcoin and the rest go down because of higher interest rates. So, do higher interest rates help or hurt crypto?
Banking’s View of Interest Rates and Crypto
Bankrate writes about Fed impacts on stocks, investments in general, and crypto. Specifically, they are talking about when the US Federal Reserve raises or lowers interest rates. When the US experienced the highest inflation in forty years, the Fed started to raise interest rates. Higher rates and the prospect of ever-higher rates has weighed on markets for a couple of years. Finally, in June of 2023, the Fed paused with its rate hikes due to inflation having improved.
For all of that time, rate increases have affected world currencies, commodities like oil, stocks, and, yes, cryptocurrencies. If you have been in hibernation since late 2021 you have missed crypto winter which essentially gutted the crypto industry. Bankers now speculate on what comes next. Investors, especially in the stock market, always worry about higher interest rates. Now that rates have likely peaked, the stock market is less worried.
A legitimate worry at this point is not that the Fed will be raising rates but that continual borrowing by the US treasury will drive rates up. This is a problem because the US does not live within its means and continually borrows. Meanwhile, the nation is always flirting with government shutdowns and not paying its debts. That does not please those who have typically trusted the dollar as the safest investment. Bankers still see higher rates as bad for stocks and crypto. The crypto world says, “I told you so,” and sees crypto benefitting over the long term.
Crypto Will Rise As Currencies Devalue
Coinbase writes about ratings agencies like Fitch downgrading US debt. This tends to lead to rising U.S. interest rates. The point that they make is that one should not look at the short term and how higher rates make the dollar stronger and crypto weaker. One should look at how all of this affects the purchasing power of the dollar and other currencies. The US keeps borrowing and printing money. Over the long term this devalues the dollar and helps crypto. This is because a cryptocurrency like Bitcoin has an internally defined limit to how many can ever be produced or mined. Bitcoin is also not the vehicle responsible for digging the US out of its financial hole. It is not the vehicle necessary for financing the role of the US as the policeman of the world. The factors that drive interest rates up are tied to the factors that will drive up crypto and drive down the dollar over the long term.
Which Is the Riskier Asset?
Where is the risk worse today? Is it with Bitcoin or is it with the US dollar? Investors are driven by where they see profit potential and where they see risk. For several years interest rates were at rock bottom and investors saw profit potential in stocks and cryptocurrencies. When the Fed jacked up interest rates, stocks and crypto became risky. Going forward, which is riskier, crypto or the dollar? When we see the US House of Representatives fire their Speaker and essentially go out of business, that does not instill confidence in the US government or the dollar. When we see the US supporting Ukraine against Russia we may feel that democracy is safer. But, we wonder about the cost and how much extra debt this will add to the equation. Despite issues of regulation, crypto excesses, there is still a place for Bitcoin and the fact that they will not be mining more and more of them forever and ever.