The President of the United States has once again called on the Federal Reserve to significantly lower interest rates. For Dan Tapiero, of DTAP Capital, such a “debasement of the dollar” would benefit Bitcoin and other hard, store-of-value assets.
Tapiero believes that Trump hopes to drive economic activity by effectively charging customers to hold money in the relative safety of banks or in bonds prior to the 2020 Presidential Election. However, such policies may also encourage more people to look for alternate means to store their wealth.
Bitcoin Doesn’t Do Negative Interest Rates…
When growth slows in an economy, an increasingly popular method used by central banks to encourage fresh spending is to cut interest rates. Typically, banks make interest payments to those storing cash with them. A high interest rate will encourage saving and a low one should encourage spending and borrowing, driving new economic growth.
Negative interest rates were first used in the aftermath of the 2008 economic crisis in Europe. In 2014, the European Central Bank cut interest rates below zero for the first time. The move was a response to low inflation and a severe debt crisis. Since then, other central banks, including that of Denmark, Switzerland, and Japan have all introduced negative rates.
Most economists predicted that Donald Trump would want lower interest rates going into the 2020 Presidential Election. However, he has today tweeted encouragement for the Federal Reserve to lower rates to below zero:
Investor and Bitcoin proponent Dan Tapiero believes that the negative interest rates proposed by Trump to stimulate growth going into his election campaign may directly benefit Bitcoin.
The rationale behind Tapiero’s argument is that people who were quite content to store their wealth at a bank are encouraged to do something else with their cash. Such a “debasement of the US dollar” may drive people towards “alternative stores of value”, says Tapiero.
Tapiero mentions both Bitcoin and gold specifically in his Tweet. Although his position seems sound on a theoretical basis, it rests largely on confidence in Bitcoin that is probably still lacking.
A central bank will usually introduce negative interest rates in response to an economy becoming risk averse. At the moment, it seems premature that US investors will see Bitcoin as a true safe-haven and start to pour money into the digital asset in response to any impending Federal Reserve attack on interest rates.
Although Bitcoin possesses qualities necessary for it to be deemed an effective store-of-value asset, it seems far fetched to believe that there is enough collective trust for the asset to become a viable alternative to holding money at a bank just yet. In the eyes of the world (and rightly so), it’s still a huge risk asset. It offers something so radically different from any other form of money. Distrust and scepticism is natural. However, Bitcoin can overcome these hurdles by just continuing doing what it is doing.
It’s important to remember that this is still very early days in the Bitcoin story. Provided the network continues to function as it has been doing, public trust in the cryptocurrency will grow. As trust grows, Bitcoin’s market capitalisation will swell. This will make it even more effective as a means of storing value. A larger market capitalisation will eventually mean that a lot more money is needed to move the price in the kind of swings synonymous with cryptocurrency markets today.
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