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As inflation rises and interest rates drop, could this be the perfect time for Bitcoin?

Photo of: Nathan VDH
by Nathan VDH

While storing value is only a fraction of Bitcoin’s potential, it could be perfectly suited to the troubled economic times ahead. In the midst of one of the most devastating economic crisis in decades, the Federal Reserve has announced that inflation might be allowed to cross the 2% threshold temporarily.

At the same time, there are ongoing talks about lowering interest rates and potentially offering negative interest rates to boost spending and restart the economy. Most central banks, whether in North America or Europe, are getting ready to print money at an unprecedented rate to overcome the imminent economic slump.

This is very bad news for anyone saving their cash under their beds. While savers keep their dollars comfortable, they will lose a lot of value. This makes alternatives like Bitcoin very appealing. In the hours following Fed Chair Jerome Powell’s announcement that inflation would be allowed to rise, Bitcoin spiked to $11,600 back from around $11,000.

The USD currency index, which has been steadily falling since the end of March amidst the panic around coronavirus, has not reacted well dropping even further at the news that the money printers were going overdrive. It is no surprise that inflation will threaten the value of the dollar and options such as Bitcoin are hailed as excellent alternatives to store money during this recession.

From its very inception, Bitcoin has always challenged the mainstream financial system and one might argue it is not a question of whether but rather how much it will influence the global economical crisis and how quickly the economy can get back up after such recession.

It’s no surprise that gold also gained value after these announcements, being one of the best ways to survive monetary devaluations for decades. Bitcoin is often referred to as digital gold, and the connexion has rarely been clearer between the two. While it’s additionally a lot more useful than gold bars, the value of Bitcoin as a safe haven in the coming economic period will surely increase its price.

However, Chair Jerome Powell’s comments were very much expected by the financial community and as such did not have an effect as impressive on the market rate of Bitcoin as one might have expected. These talks and these policies have been extensively discussed in public these last few months and we should not expect more than a temporary surge on the back of these comments alone. Traders know full well the value of « digital gold » in uncertain economic times and while Powell’s comments might have tipped the scales, they have not come as a shock to anyone interested in the world of cryptocurrency.

Mainstream actors did take notice of these comments as well and they might unexpectedly boost Bitcoin’s profile in the coming days as they realize its value. More recent developments such as Fidelity Investment offering up an investment fund in Bitcoin to wealthy investors show however that these declarations might have a long term effect in forcing the hand of the financial establishment when it comes to managing wealth and this should have a positive effect on the long term viability of Bitcoin as a tool for storing value.