Since the Great Financial Crisis of 2008 and 2009, major central banks have taken an incredibly dovish stance on monetary policy to stimulate the economy, a strategy that has been exacerbated by the coronavirus pandemic. Where this was not a problem before, today we are seeing a spike in prices across the entire US economy as a direct result of money printing.
And now to curb the soaring inflation for everything from groceries and gas to rentals and used cars, interest rates are rising. But the Federal Reserve’s recent hawkish stance could swing into dovish in the not-too-distant future, and that would be an extremely bullish situation for a particular asset – Bitcoin (BTC 1.56%).
To be clear, as long as the central bank continues to raise interest rates to curb inflation which is at a 40 year high, I see Bitcoin remaining under pressure. Indeed, in this environment, investors are turning to safer assets, such as treasury bonds and even cash instead of more speculative financial instruments like growth tech stocks or cryptocurrencies. This helps explain why the Nasdaq Compounda tech-heavy stock index, lost 17% in 2022, roughly double the S&P500‘s drop (at the time of this writing).
A prolonged period of low crypto prices is known as the crypto winter. Meanwhile, silver generally exits the space as investor interest wanes. Like the bubbles that burst in traditional financial markets, this is when flawed, fraudulent and unsustainable projects and companies are shaken up, and the strongest teams and companies will survive. In the area of crypto in particular, developer activity is expected to remain strong, regardless of prices.
Therefore, for someone who has money in reserve that he is willing to put to work, buy bitcoin, which has fallen 65% from its all-time high last November and is in a major bear market, could be a smart financial move right now. Indeed, not only is its long-term potential absolutely huge, but in the next 12 months or so, we could see more supportive monetary policy.
The objective of the Federal Reserve is to curb inflation without causing the economy in a recession, with what is called a “soft landing”. But some investors don’t believe that’s a realistic scenario. The US economy has contracted for two consecutive quarters, which technically means we are already in a recession. The Biden administration, on the other hand, released a statement saying the US is not in a recession, but I think that was done so the public wouldn’t panic.
Central bankers point to a strong labor market and a 3.5% unemployment rate, but that can be misleading. According to a survey by the small business insurance market Insuranks, 44% of Americans have taken parallel steps to earn extra money. And there are more Americans today working two full-time jobs than in February 2020, before the pandemic hit the economy. Additionally, consumer confidence is at an all-time high.
This means that as the Federal Reserve continues to set higher interest rates to stop inflation, it will inevitably lead to a full-scale recession that would go undebated. And at that point, the central bank will probably have to change course and start cutting interest rates again because it would need to stimulate economic growth. As a result, liquidity will again be injected into the financial system to encourage lending by banks and consumer borrowing and spending.
And when that happens, the investment case for owning Bitcoin will become surprisingly clear. Governments around the world need to keep the slot machine going and keep interest rates low, in order to support their colossal debt burden, again creating an environment for high inflation to return. If only there was a rare store of digital value that was absolutely finite without any central bank controlling it. Fortunately, there are. It’s called bitcoin.