Imminent rise in US interest rate could bring Bitcoin down

Over the past few years, the thesis raised by big names in the financial market such as Michael Saylor and, here in Brazil, Richard Rytenband, that Bitcoin is an alternative store of value to the current economic system and equals assets like Gold.

This is due to its properties such as:

  • Preservation of value;
  • Finitude/scarcity: it is neither abundant nor easy to find;
  • High liquidity: not difficult to find buyers/sellers;
  • Do not deteriorate over time.

Assets as a store of value show their importance in periods of adversity, during crises or periods of recession, not necessarily as index PUTs (Insurance that appreciates when index declines occur, for example: S&P500 or Ibovespa.) but rather as a result of the over time.

What is the relationship between Reserve of Value and Interest?

Generally, as they do not have yields, assets as a store of value have a great impact due to the carrying cost or opportunity cost, which is generally defined by the market using the discounted US 10-year interest rate as a parameter. inflation.

This methodology is applied because these bonds are still seen by the majority as the safest investment in the market.

Thus, a long increase in the interest rate consequently increases the opportunity cost of holding assets that do not generate income, negatively impacting their price.

It is quite easy to demonstrate this thesis by relating the 10-year TIPs (Treasury Inflation-Protected Securities) of the US vs the price of an ounce of gold in dollars.

Source: fred.stlouisfed.org
Source: fred.stlouisfed.org

The last period of significant rise in interest rates preceded a 45.27% drop in gold from top to bottom.

The recent inflationary pressures suffered by the US tend to leave the FED with no other way out than to raise interest rates and reduce monetary stimuli to contain the rise in consumer prices, something that, even after some repercussion, has not yet been dealt with. adequately by the US Central Bank, as the target rate remains at 0.25% per annum.

As in Brazil, by COPOM that only after its first meeting in January 2021 began to give signs (with the withdrawal of the forward guidance) that it would reduce stimuli and eventually start rounds of monetary tightening, even at the time the accumulated IGP-M had already surpassed 20% a year, we now see inflation in the US putting pressure on the Fed and the same underscoring it.

Source: www3.bcb.gov.br (Citizen Calculator)
Source: www3.bcb.gov.br (Citizen Calculator)

This dynamic was also observed among other emerging countries such as Mexico, Russia among others. The weaker branches tend to give way first, but it’s a matter of time before the developed ones have to adopt similar attitudes.

The next Fed meetings will take place on September 21 and 22, the central bank will hold its conference in Jackson Hole, Wyoming, an event that Fed leaders have often used to signal changes in monetary policy. It is worth following and keeping an eye on the unfolding of this plot.