The Steepest Fed Rate Hike Cycle Should Have Killed Bitcoin, but Something Different is Happening
In a keynote at the ongoing Korea Blockchain Week, Arthur Hayes, the founder of BitMEX and Chief Investment Officer at Maelstrom, argued that despite the steepest Federal Reserve (Fed) rate hike cycle in decades, bitcoin and other risk assets are thriving. Typically, a rate hike cycle of this magnitude would signal a recession and cause a decline in asset values. However, economists have revised their recession forecasts, bitcoin has doubled in value, and tech stocks like Nvidia are soaring.
Hayes believes that the Federal Reserve’s attempts to combat inflation through interest rate hikes have unintentionally impacted the broader economy. These rate hikes can stagnate financial asset prices, reducing tax revenue and increasing deficits. As a result, the U.S. Treasury issues more bonds, leading to increased interest payments to the wealthy, which stimulates spending and economic growth.
Hayes concludes that regardless of whether the Fed raises or cuts rates, the cryptocurrency industry is in a favorable position.
A.I Mania and its Effect on Crypto
In an interview with CoinDesk, Hayes provided insight into his upcoming speech at Token 2049 in Singapore, where he will discuss the relationship between artificial intelligence (AI) companies and the banking system. Hayes argues that AI companies, with their substantial cash reserves and robust revenue streams, are less reliant on banks for loans or credit compared to traditional businesses.
Hayes suggests that the global government bond market is at risk of default unless central banks print more money. This puts significant strain on the banking system. Due to this, Hayes expresses a preference for investing in AI companies like Nvidia rather than traditional businesses that require credit. He believes Filecoin is a major beneficiary of the AI-crypto crossover, citing the increasing computational power being added to its network.
Despite the potential for growth, Hayes warns that investing in AI may not yield immediate returns. Many AI companies are overvalued, have lengthy timelines to IPOs, and may have a poor product-market fit. Hayes predicts that the convergence of AI, crypto, and money printing will create a significant asset bubble, potentially surpassing the Great Depression’s bubble of the 1930s.
Hot Take: A Unique Relationship Between Fed Rate Hikes and Crypto
The relationship between the Federal Reserve’s rate hikes and the performance of crypto assets like bitcoin is defying expectations. Despite a rate hike cycle that typically signals a recession and a decline in asset values, bitcoin and other risk assets are thriving. This suggests that the standard playbook is starting to break down.
Arthur Hayes, founder of BitMEX and Chief Investment Officer at Maelstrom, argues that the unintended consequences of the rate hikes have resulted in stagnating financial asset prices, reduced tax revenue, increased deficits, and more bond issuances. These factors, combined with political hostility towards austerity, have paradoxically fueled economic growth.
This unique relationship between the Fed rate hikes and crypto positions the cryptocurrency industry favorably, regardless of the Fed’s future decisions. It highlights the resilience and potential of the industry in the face of traditional economic indicators.
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