Today I’m going to talk a little bit about the current state of fiat currency. More specifically, I’ll be covering the potential effects of negative interest rates and what they might mean for the Crypto market.
If you’ve been following the activity of central banks in 2020, you may have noticed they’ve been more active than ever – in part thanks to the COVID-19 pandemic.
In fact, the US Federal Reserve has printed more money this year than every other year combined, and they’re not done yet!
Now all eyes are on central bank interest rates as they trend towards negative figures for the first time in history.
Before we get into it, let’s do a quick recap on what these two actions by central banks are designed to do for us:
Central banks are designed to control the flow of money through the economy, lending a helping hand here and there to keep things running at a steady pace.
In times of economic difficulty, they only have a handful of tools they can use to “stimulate” the economy, essentially to try to get people to spend money.
The main two tools, as touched on above, are printing money and lowering interest rates:
Since money is already being printed at record speeds, more pressure is mounting on central banks to use their only other trick: Drop interest rates even further.
To examine the current state of interest rates, we can take a look at US Treasury Bonds.
Bonds can be thought of as a term-deposit savings account with a government. Bond buyers give the government their money to hold and use, in exchange for the most secure savings account of all – complete with an interest rate return.
Rather than retail banks, these bonds will be the first “savings accounts” to begin yielding negative interest rates.
As can be seen on the chart above, these interest rates are already approaching zero, with current rates on the longest-term bonds providing much less than one percent yields.
Very soon, the only way to go will be into the negatives.
A negative interest rate means that savers will have to pay governments or banks to store money with them, rather than the saver earning interest.
A bizarre concept, right?
This, combined with the fact that money is rapidly losing value from money-printing, creates some truly dangerous conditions for the status of fiat currency.
In the case that the bond markets go negative, suddenly it will not be all that attractive to hold government bonds. In fact, holding any form of fiat cash becomes less attractive, because there is less benefit (or even a negative benefit) to holding it at all!
Ultimately, this is likely to trigger plenty of panics, as people seek out other assets to store their wealth in.
Cryptocurrency will very likely be one of the most attractive alternative assets to preserve wealth.
As of August 2020, the ICMA estimates that the total value of the global bond market is around $128 trillion.
If just 10% of this flows into Crypto over time – which isn’t a long shot – that would give the Cryptocurrency market, as a whole, a $13 trillion market cap.
If all of that 10% went to Bitcoin, each Bitcoin would be worth a whopping $600,000!
Cryptocurrency, being an asset out of state control but having all the properties of money, is suddenly going to look a lot of more attractive than it already does now.
With bond yields rapidly approaching zero, this could all happen much faster than we think. Fiat currency is losing its value, and fast.
The only question that remains is, where will all that wealth go?
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