How Would Negative Interest Rates Affect Bitcoin?
Tags: Central Bank, Crypto, Negative Interest Rates, Deflation, Bitcoin

How Would Negative Interest Rates Affect Bitcoin? faast Follow Jun 19 · 3 min read

In the wake of the coronavirus pandemic, more central banks are considering negative interest rates.The question on many crypto traders minds is: Would going negative have a positive or harmful effect on bitcoin?

What are Negative Interest Rates?

Central banks such as the Federal Reserve System or the Bank of England set interest rates to maintain a balanced economy and adjust monetary policy. The rates set by central banks service as a guide for banks and other lenders to determine rates of interest on loans.

Interest rates are raised to protect against inflation and raise the price of borrowing money. When a recession occurs however, central banks will lower interest rates to encourage borrowing and spending, in hopes of stimulating the economy.

After the coronavirus crash, the Federal Reserve System in the US cut rates to an unprecedented 0%. During economic hard times, people tend to hoard money rather than spend it, which overtime can contribute to a deflationary cycle which is very hard to break out of.

A weapon of last resort against this is negative interest rates, where the central bank sets rates below 0%.

Imagine if your bank punished you for saving money by charging a fee rather than paying you interest. Well, people in countries like Greece, and Japan don’t have to imagine; they have negative rates right now.

The hope is that negative rates will stimulate the economy by encouraging borrowing and spending while dis-incentivizing people from just stashing cash.

The problem is that the jury is still out on whether this works, and once you go down this route, it’s very hard to reverse course. The European Central Bank for instance, began its experiment with negative rates in 2014 and hasn’t found a way out since.

Should Crypto HODLers Be Afraid of Negative Interest Rates?

Negative rates are bad for savers of fiat currency, but it could be great news for bitcoin.

Nobody- whether they are ordinary people or institutions- likes putting money in the bank and losing it. Perhaps that is why a recent Fidelity survey found that European institutional investors held much more favorable opinions of cryptocurrencies than their American counterparts, and were nearly twice as likely to have it in their portfolios. Negative rates, and the fact that cryptos are not controlled by a government or central bank, is a factor in this.

Investors in countries where negative rates have been tried obviously don’t like losing money, and swapping euros for BTC can seem like a smart idea in that situation. While crypto comes with its own, risks, it is still more appealing for some than a savings account that is guaranteed to lose money.

On the other side, if a central chooses not to go negative and to print money to stimulate the economy instead, it could also benefit bitcoin. QE isn’t working as quickly as hoped, especially with so many business still closed down due to COVID-19. Some fear it could trigger rapid inflation.

Central banks are essentially stuck with two bad decisions: let the money printers go BRRRRRR, or set negative interest rates.

The economic crisis caused by the coronavirus is still with us, and the precedent for letting interest rates go negative has already been set in Europe, Japan and elsewhere. There are now rumors the US could see negative rates in the near future. Unaccustomed to seeing this, US bank customers could begin withdrawing funds and putting them in BTC.

In either case, bitcoin could benefit as investors seek a hedge from this financial uncertainty.

This is an exciting time to get into cryptocurrency. Until now, the cryptocurrency world has been driven by idealism and visions of a better monetary future. In the next few years, we will see what it is truly capable of.

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