The Federal Reserve cut interest rates this week. While the central bank was hoping to boost the falling stock market, the move seemed to spook investors. All the major US stock market benchmarks swung upward for just one day on Wednesday after the cut.
But investors continued to dump equities Thursday. On Tuesday, when the Fed rate cut was announced, the stock market ended the trading session with a loss.
It seems the Fed’s efforts to save the stock market were a terrifying confirmation of the worst coronavirus fears. The surprise Fed rate cut was remarkable in two ways.
It was the first time the Federal Reserve has cut interest rates by half a percentage point since the 2008 financial crisis. And it was also the first emergency Fed rate cut since 2008 as well. Because of this, the markets are panicking now.
While the Fed rate cut seemed to make Wall Street’s losses worse, it actually gave a boost to Bitcoin. That’s something some cryptocurrency industry insiders predicted might happen.
The sudden change to the interest rate environment in the Dollar economy even seemed to shake Bitcoin out of its positive correlation with equities since the stock market correction began last month.
While stock market prices crashed, Bitcoin’s price crashed along with it. That led financial analysts and cryptocurrency industry watchers to wonder what was going on with Bitcoin and whether it the global macro hedge thesis was beginning to lose credibility.
But this week’s upward swing in the Bitcoin price since the emergency Fed rate cut has put Bitcoin right back where it was during the stock market rout last May: climbing upward as investors store their money somewhere they know for a fact they’ll be able to get it back from.
Further, there’s no central authority like the Fed to govern the supply of Bitcoin. The brutally deflationary digital cryptocurrency is hardcoded to create a limited supply according to a predetermined schedule.
This week’s Fed rate cut gave Bitcoin a boost in two ways. For one, it directly increased the circulating supply of dollars relative to bitcoin. Because Bitcoin has a fixed supply, that causes the crypto to gain value against the Dollar.
Secondly, it proved the primary use case for Bitcoin yet again. Bitcoin has several fantastic use cases. For instance, as a stable currency (yes, seriously) in countries facing crises that make their money volatile. Venezuela comes to mind.
It’s also useful for anonymity. And if you were in a bind, you could memorize twelve words to access your private keys and flee from an oppressive government or a civil war with your entire life savings in your head.
All very cool use cases. But the primary use case for bitcoin is as a store of value that cannot be manipulated by a central authority. Every time the Fed intervenes to manipulate markets (which is illegal for anyone else to do), it backs up the reason Bitcoin came to exist after the last financial crisis.