As Fed Swats Down Negative Rates, Bitcoiners Wonder What Might Have Been

MARKET MOVES

After bitcoin's much-hyped halving failed to generate a price rally, crypto traders are already turning to a new bullish investment thesis: the possibility the Federal Reserve might cut its benchmark interest rate below zero.
Fed Chair Jerome Powell said in a televised interview Wednesday that negative rates are "not something that we're looking at." The remark disappointed U.S. stock traders who were hoping for an easier monetary stance, helping to send the Standard & Poor's 500 down by 1.7% to a three-week low.
Bitcoin, on the other hand, jumped some 6% on Wednesday to about $9,300. The cryptocurrency has now recovered about half of what it lost in a four-day sell-off through Monday, when bitcoin underwent the third halving in its 11-year history.
Source: TradingView.
Some analysts had predicted the halving, which cut bitcoin's block reward from 12.5 BTC to 6.25 BTC, could send prices to $90,000 or even higher; the anaemic price action in the lead-up to the event left some bulls feeling underwhelmed.
But the prospect of negative interest rates might be rekindling traders' spirits — or at least refocusing attention on bitcoin's possible use as a hedge against the inflation that might come from historically easy monetary policy.
Despite Powell's comments, traders in U.S. interest-rate futures on Wednesday continued to bet that the Fed might implement negative rates by early next year, according to Reuters. So far, the Fed has relied on monetary-policy actions it used in the 2008 financial crisis, including cutting rates close to zero and injecting trillions of dollars of new money into global markets.
For crypto traders, the new bet is that negative interest rates could eventually help push up inflation — reducing the dollar's purchasing power, and thus pushing up the price of bitcoin (BTC) in dollar terms.
"If rates go negative, more and more people will realize what we already see," Omer Ozden, CEO of the blockchain-focused merchant bank RockTree Capital, told First Mover in a Telegram message. "The risk is not being in BTC. The risk is being in fiat."
Source: CoinDesk Research.
Bitcoin prices are up 30% in 2020, an enviable performance when compared with returns in traditional asset classes. Gold, traditionally seen as an inflation hedge, is up just 13% this year, while the S&P 500 is, coincidentally, also down by 13%.
Since 2014, four major central banks have experimented with negative rates, including the European Central Bank and those of Switzerland, Japan and Sweden.
U.S. President Donald Trump, who has not shied away from using his bully pulpit in recent years to pressure the Fed to cut rates, tweeted on Tuesday that "as long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!"
It goes without saying that looser monetary policy could help stimulate the economy, which would likely help his reelection chances in November.

The whole idea of negative interest rates can be a bit of a head-scratcher, of course.
"The practice of paying people in order to borrow money flips all financial models on their heads," Mati Greenspan, founder of the foreign-exchange and cryptocurrency research firm Quantum Economics, told First Mover in an e-mail. "Suddenly debt becomes something that is coveted and savings become a thing of the past."
But there's some support among top U.S. economists for the emergency use of negative rates. Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, wrote last month for Bloomberg Opinion that U.S. monetary policymakers "should fight a rapidly deepening recession by taking interest rates below zero."
In 2016, the late Carnegie Mellon University economics Professor Marvin Goodfriend argued central banks should consider negative rates as a "realistic policy option" in a financial crisis because large-scale balance-sheet expansions might lead to "destructive inflationary finance."
Ariel Zetlin-Jones, an associate economics professor at Carnegie Mellon, who has conducted research on blockchain networks, said in a phone interview Wednesday that negative rates are a "tricky issue" and could prove unpopular because they might cause "plumbing issues in the banking system."
Banks might try to pass along the negative rates to depositors, and some customers might accept those, given that recessions tend to be deflationary, he said. A report this week from the U.S. Labor Department showed that core consumer prices fell 0.4% in April, a record drop in data going back to 1957.
"Even if banks nominally are charging a slight negative rate, if you think prices are going to continue to fall, you're still making money on average," Zetlin-Jones said.

Some savers might simply choose to withdraw their money and hold cash — to avoid the negative rates.
"But that may not be something they want to do," Zetlin-Jones said. "So they might look to send those funds elsewhere, say into bonds that pay some interest, or into other speculative asset classes, say into bitcoin."
Unlike many stocks, bitcoin pays no dividend; unlike bonds, bitcoin pays no coupon.
In that sense, negative rates in the U.S. would reduce the "opportunity cost of holding non-income producing assets like BTC or gold, potentially making them even more attractive to investors," Kevin Kelly, co-founder of the cryptocurrency research firm Delphi Digital, told First Mover in an e-mail.
"In my opinion, there's a non-zero chance the Fed winds up taking rates below zero, despite Powell's dismissive attitude towards the idea, if current deflationary pressures persist," Kelly wrote.
A non-zero chance? With bitcoin's halving now in the past, that might be enough to salvage optimism among the bulls.

BITCOIN WATCH

WHAT'S HOT?