In a recent blog post, BitMEX co-founder and macro-analyst Arthur Hayes challenged the conventional wisdom regarding the relationship between Bitcoin and interest rates. He argues that traditional economic logic would crumble under the immense debt burden of the US government.
Hayes points out that central banks and governments are struggling to address the unique challenges of today’s economy with outdated economic theories. This comes as the Federal Reserve has increased its benchmark rate from 0.25% to 5.25% over the past year in an effort to curb inflation and maintain a 2% target.
Despite the Fed’s success in curbing inflation, Hayes expresses concerns that inflation might persistently exceed expectations, given the substantial nominal GDP growth of 9.4% in Q3 compared to the 5% yield on 2-year US Treasury bonds. He highlights that according to data from the Atlanta Fed’s GDPNow forecast, nominal GDP growth remains “astonishingly high.”
Conventional economic theory would suggest that as the Fed raises rates, a credit-sensitive economy should falter. This was evident in financial asset markets, including stocks and Bitcoin, which experienced a downturn in 2022. However, this decline in tax revenue led to increased government deficits that needed to be funded by issuing more bonds to repay existing debt. In a high-interest-rate environment, this translated to higher interest payments to wealthy bondholders.
Hayes believes that as long as the economy outpaces the government’s debt obligations, bondholders might seek more lucrative “risk assets,” such as Bitcoin. He contends that the Federal Reserve’s efforts to combat inflation would ultimately favor “finite supply risk assets” like Bitcoin.
The Fed’s strategy of siphoning money from one part of the economy while injecting it into another creates uncertainty. As long as the Fed’s approach to taming inflation remains uncertain, assets like Bitcoin are likely to experience long-term growth.
Analysts generally perceive lower interest rates as beneficial for Bitcoin and other risk assets, as they create an environment where investors have room to speculate for potentially higher returns. Hayes acknowledges the positive influence of low rates on Bitcoin’s price, characterizing its relationship with central bank policy as a “positive convex relationship.”
He concludes that the US and the global economy are currently operating in an extreme environment, where things become non-linear and sometimes binary. With monetary policies tightening, Bitcoin’s price may rise as bondholders seek more lucrative investments.
