The rush into cryptocurrency assets like Bitcoin since the coronavirus pandemic’s lows a year ago is facing its first giant hurdle as rising US interest rates increase fears of the 2013-like “taper tantrum.”
According to data collected from multiple exchanges, BTC/USD boomed by over 1,200 percent from in the US dollar terms from its mid-March nadir to hit a historic peak above $58,000 last week. The surge appeared as part of a ferocious hunt for returns after the global central banks’ stimulus pushed interest rates in the developed markets to record lows.
But a dramatic drop in government bond prices since the beginning of 2021 has brought the borrowing costs higher.
Its upswing has rippled into the cryptocurrency market with a delay, causing Bitcoin to plunge by as much as 24 percent from its sessional high. Messari’s crypto data tracker shows a 17 percent decline in the market cap in the last seven days, reflecting drops in cryptocurrencies stretching from the second-largest Ethereum to largely unknown “shitcoins.”
The rise in five-year and 10-year Treasury yields follows an optimistic job report in the US. Labor Department data released Thursday shows a dramatic drop in the unemployment claims last week.
Coupling that with the Food and Drug Administration’s approval of the Johnson and Johnson’s coronavirus vaccine earlier this week, investors anticipate the US economy to recover faster-than-expected. That has prompted them to reduce their exposure in profitable safe-havens (gold, bitcoin, etc.) and seek better profits from riskier trades.
…analysts believe the Federal Reserve will need to intervene if the yields rise beyond critical levels, given its chairman Jay Powell’s intentions to continue its asset purchasing program at the rate of $120 billion per month and keep interest rates near zero until 2023 until they achieve maximum employment and inflation rates above 2 percent.
“If the FED responds to these yields through treasury purchases, it means more QE, less DXY demand, and more hidden inflation within the system,” SAID Ben Lilly, partner with Jarvis Labs. “
“The key is which part of the yield curve do they buy? I personally believe any additional QE-like responses right now is bullish. But if no action, headwind,” the analyst added.
Corporate’s Booming Bitcoin Adoption
If not institutional investors, US corporates have already started making their backup plans against inflation. Nasdaq-listed firms Tesla and MicroStrategy added billions of dollars worth of bitcoin units to their balance sheets, anticipating that the cryptocurrency’s gold-like monetary features would protect them from cash devaluation.
Service-based firms also recognized growth in the cryptocurrency sector against the Fed’s dovish policies and the US government’s expansive stimulus packages. In February alone, credit card giant Mastercard and US’s first banking service, Bank of New York Mellon, announced that they would integrate bitcoin services into their existing traditional platforms.
“Traditional treasury strategies no longer work to preserve shareholder value,” said Michael Saylor, the MicroStartegy CEO. “Corporations need new techniques to manage the dilutive impact of monetary inflation on their balance sheet. The best idea is Bitcoin.”