Major central banks have taken a very accommodating approach toward monetary policy to stimulate the economy ever since the Great Financial Crisis in 2008 and 2009, a strategy that was made worse by the coronavirus outbreak. Previously it was not a problem, but as a direct consequence of the money printing, prices are now rising across the US economy.
Interest rates are already rising to combat the surge in prices for everything from rent and used vehicles to groceries and petrol. The current hawkish posture of the Federal Reserve, however, might change and become dovish in the not-too-distant future, which would be incredibly positive for one asset in particular — Bitcoin (BTC 0.70%).
Bitcoin winter
To be clear, I expect Bitcoin to stay under pressure as long as the central bank keeps raising interest rates to curb inflation, which is near 40-year highs. This is due to the fact that in this climate, investors choose safer investments like Treasury bonds and even cash over riskier ones like growing tech companies or cryptocurrencies. It explains why the Nasdaq Composite, a stock index heavily weighted on technology, has fallen 17% in 2022, or twice as much as the S&P 500.
A crypto winter is a protracted period of low cryptocurrency values. As investor interest wanes over this period, money often drains out of the area. This is when flawed, fraudulent, and unsustainable initiatives and businesses are shook out, and the toughest groups and businesses will survive, much as when bubbles burst in conventional financial markets. Independent of price movements, developer activity should continue to be robust in the cryptocurrency sector.
Therefore, considering that Bitcoin is now in a significant bear market and has dropped 65% from its all-time high in November, purchasing it might be a wise financial move for someone with capital that is ready to invest. Its long-term potential is extremely enormous, and over the next year or two, we could see more benevolent monetary policy, which is why.
Turning around
With a “soft landing,” or the slowing down of inflation, the Federal Reserve hopes to prevent the economy from entering a recession. However, other investors don’t think this is a likely situation. Since the U.S. economy has contracted for two straight quarters, strictly speaking, a recession has already begun. The Biden administration, on the other hand, has released a statement claiming that there is no recession in the United States, but I believe this was done to calm the public’s fears.
The solid job market and 3.5% unemployment rate are cited by central banks, although this may be deceptive. A poll by the small-business insurance marketplace Insuranks found that 44% of Americans had side jobs to supplement their income. Additionally, more Americans work two full-time jobs now than there were in February 2020, before the pandemic crippled the economy. Additionally, consumer confidence has never been worse.
This suggests that a full-blown recession will unavoidably emerge as long as the Federal Reserve maintains raising interest rates to combat inflation. In order to encourage economic development at this juncture, the central bank will likely have to reverse direction and start slashing interest rates once again. As a consequence, the financial sector will once again get a boost of liquidity to support consumer borrowing and spending as well as lending by banks.
The investment rationale for holding Bitcoin will then become glaringly obvious when this occurs. In order to finance their enormous debt loads, governments must continue printing money and lowering interest rates, which once again fosters the return of high inflation. If only there existed a scarce, totally finite digital store of value that was not governed by a central bank. Fortunately, there is. It is known as Bitcoin.
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