Bitcoin has so far been very sensitive to any decision coming from the Federal Reserve, experiencing massive sell-offs in a positive response to inflation.
This has caused many to worry about how Bitcoin will perform in an environment of rate hikes, given the fact that the Federal Reserve is considering four rate hikes by 2022.
While Bitcoin’s performance over the past two months has not been so promising, a recent report showing its recent sensitivity to inflation is indeed an extremely optimistic sign.
Rising Interest Rates Force Bitcoin to Behave Like Other Inflationary Assets
What will happen to Bitcoin in a market of increasing interest?
This is the question that the latest CoinShares Digital Asset Outlook Report attempts to answer.
After nearly a decade of unprecedented quantitative easing (QE), the market is starting to come to terms with the possibility of inflation hitting the US market. This also worries the Federal Reserve, forcing it to consider phasing out qe sooner than the market expected.
To curb the inflation they believe is certain to come, the Federal Reserve is considering four rate hikes this year, instead of the two originally proposed in 2021.
The last time the Federal Reserve raised interest rates was in 2015, Bitcoin rallied more than 51% over a six-month period. With borrowing becoming more and more expensive, many people flock to Bitcoin seeing it as a hedge against volatile markets.
However, CoinShares analysts believe that this time bitcoin will not repeat this pattern.
“We believe Bitcoin has matured significantly since then and is therefore likely to behave differently, and potentially align with other (inflationary) real assets,” the report said.
Therefore, to understand how Bitcoin will perform, we need to look back at how other inflationary assets have performed during previous periods of interest rate hikes.
CoinShares has identified five periods that are closest to today’s date – they have all seen an increase after periods of decline or relatively low interest rates over a long period of time. During December 1976, December 1986, February 1993 and June 2004 gold and other industrial commodities all showed surprising consistency in performance.
As a fixed supply and priced in US dollars, Bitcoin will most likely behave in a similar way to gold and other inflationary assets.
In December 2021 and January of this year, Bitcoin experienced a strong reaction to inflation and an increasing probability of interest rate hikes, falling more than 30% from its highs. This means that any upcoming rate hike will drive its price down, with each subsequent hike triggering a less intense recession.
However, after a period of decreasing price swings, Bitcoin will most likely see a significant increase in price. This is consistent with the way most assets practice during similar interest rate cycles, as well as Bitcoin’s inverse relationship with the strength of the US dollar.
Specifically, after periods of rate hikes, the US dollar has experienced periods of extreme volatility and has fallen an average of 7% within a year.
Since there is a high probability that the Federal Reserve will raise interest rates too aggressively, CoinShares expects the US dollar to experience a similar sell-off this year.
With the dollar losing its strength, a large portion of the market will flock to alternative assets, with Bitcoin being the obvious choice among all cryptocurrencies. Its resistance to censorship and its ability to escape the long arm of the Federal Reserve make it an attractive hedge against inflation. If this happens, CoinShares believes other real assets like gold will follow and see periods of unbridled growth despite rising inflation and a downturn in the dollar.