In summary
- Federal Reserve Chairman Jerome Powell confirmed that the central bank’s long-awaited change of course is just around the corner.
- Arthur Hayes, co-founder of BitMEX, warned that future rate cuts anticipated by the Federal Reserve, the Bank of England and the European Central Bank could narrow the interest rate differential between these currencies and the yen.
- Hayes noted that while lower interest rates may allow investors to borrow more easily to speculate on risky assets like Bitcoin, they could also strengthen the Japanese yen and undo the yen’s “carry trade,” which could send global markets tumbling.
Federal Reserve Chairman Jerome Powell confirmed last week that the central bank’s long-awaited change of course is just around the corner. But is this really bullish for Bitcoin?
Conventional wisdom says yes, but Arthur Hayes, co-founder of BitMEX and perennial Bitcoin enthusiast, says it’s more complicated than that.
“We are forgetting that these anticipated future rate cuts by the Federal Reserve, the Bank of England and the European Central Bank narrow the interest rate differential between these currencies and the yen,” Hayes wrote in an essay on Tuesday.
In Hayes’ view, the market experienced a “sugar high” on Friday when Powell confirmed that “the time has come” to begin cutting interest rates, as the balance of risks between high inflation and a possible recession began to tilt towards the latter.
On the one hand, lower interest rates allow investors to borrow more easily to speculate on investments perceived as riskier, including stocks and cryptocurrencies. This phenomenon helped Bitcoin soar 15-fold between March 2020 and April 2021, for example.
On the other hand, weakening the dollar along with the euro and the British pound would effectively strengthen the Japanese yen and cause the yen carry trade to unravel and send global markets tumbling. The yen carry trade is when investors borrow cheaply from the Bank of Japan to invest in global assets denominated in stronger currencies, profiting as those assets appreciate with seemingly minimal risk.
A version of this “unravelling” already occurred in early August when the Bank of Japan raised rates for the first time in seventeen years to 0.25%. At the time, Bitcoin briefly dipped below $50,000, at which point Hayes told his followers to “buy the damn dip” as the central bank quickly promised not to continue raising rates amid financial market instability.
Edited by Ryan Ozawa.
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