Could Interest Rate Rise Cripple Bitcoin Bull Run?

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  • An interest rate rise on the back of reducing threat of coronavirus could be damaging for Bitcoin
  • Much of the money in Bitcoin is hiding from a weak fiat currency system, but interest rate rises could negate that
  • An interest rate rise could also cripple the stock market, to which Bitcoin is becoming inextricably tied

Interest rates have been at historic lows for over a decade, but were beginning to increase when coronavirus hit. Once the pandemic is under control and the world is back at work however, an interest rate rise will be imminent. How will an interest rate rise, or series of them, affect Bitcoin? The answer could be…badly.

Interest Rate Rise Could Follow Successful Vaccination Program

Interest rates peaked in the high teens in the early 1980s and have been on a downward trajectory ever since. This has meant that the only way for investors to make any money on their capital has been through the stock market, which has acted as a kind of replacement savings account, going progressively up while interest rates and the purchasing power of currencies has broadly gone down.

Interest rates have been at historic lows since the 2008 financial crash, and showed signs of recovery before the coronavirus pandemic. However, 14 months after we first heard about it, the coronavirus finally seems to be on its way out, at least in the major economies, where vaccination programs are starting to be rolled out.

A mass vaccination program would allow people to get back to work which would then kickstart economies worldwide. An improving economy negates the need for governments to stimulate them through cheap credit, leading to probable increases in interest rates. This would, in turn, see investors move out of the stock market and turn back to traditional financial instruments based on the interest rate, right at a time when many indices report overbought conditions. This could then lead to an exodus from the stock market.

Bitcoin Could Suffer Double Whammy

Bitcoin has, of course, passed its first financial crisis with flying colors, hitting $58,000 after dropping to $3,600 less than a year ago. However, the reason for this (at least narrative-wise) has been institutional investors looking to park their money somewhere where it might perform better than leaving it in a collapsing dollar. If the dollar were to start to strengthen on the back of an improving economy however, they would leave the Bitcoin ship and go back to holding fiat currency.

Bitcoin could be hit doubly bad in such a scenario – not only do we have billions of dollars’ worth of bitcoin being sold in this scenario, we also have a crashing stock market. Given that Bitcoin is becoming inextricably tied to the tech market given the growing adoption by companies in this sphere, any underperformance of the NASDAQ could have negative ramifications for Bitcoin.

Timing is of the Essence

This may be a doomsday scenario, but the good news is that it is likely some months away at least. The coronavirus is still killing thousands of people every day, and a vaccination program is only as effective as the amount of people who take it. Even if the world were to be vaccinated tomorrow, it would take time for the wheels of the world economy to get moving freely again, and longer still for the kind of interest rate rise that would concern stock market whales.

In short, there should still be time for the current Bitcoin bull run to play out, but afterwards, the picture may not be so rosy.