The possible increase in interest rates that the United States Federal Reserve plans to make this year 2022, may have caused the drop in the price of bitcoin (BTC) in recent weeks, according to economist Juan Ramón Rallo.
Investors could have been fleeing BTC, liquidating their positions, in the expectation of Generate higher returns with financial assets and government bonds this year, highlighted the Spanish economist and disseminator on his YouTube channel.
According to the minutes of some meetings of the US Federal Reserve, reported in the media earlier this month, this institution would plan to increase interest rates more times and faster, due to the perspective they have on the rise in inflation in the economy based on the dollar (USD) for this year 2022.
Bitcoin is a real, treasurable asset -since the cost of hoarding or storage is practically zero- and in turn with a very inelastic supply: no matter how much the price of BTC increases, the supply will not increase proportionally. The increase in BTC supply is pre-programmed regardless of what the market price of BTC is.
Juan Ramón Rallo, economist.
Rallo explains that if money depreciates, a real asset like BTC, “whose supply is not going to be diluted”, should appreciate against other assets. However, it is not the only asset that could appreciate in the event of inflation, such as the shares of companies that manufacture scarce and high-demand products.
The difference between BTC and other valuable assets, such as real estate or housing, is that BTC is extremely difficult to confiscate.
“All other assets could be confiscated by government order. Yes, they provide coverage against inflation, but if the government wants to steal them from you, they can steal them from you, but with BTC, this is not that simple, “he said.
Thus he explains that as long as there is no fear of confiscation among investors, “no matter how much inflation there is, there will not be an additional specific inflow of capital in favor of BTC […] Investors do not have to want to protect themselves specifically through BTC”, but through other assets such as gold, real estate and works of art.
While this explains why the price of BTC has not risen, Rallo emphasizes the possible increase in government interest rates to clarify the current situation of the price of BTC.
The rise in interest rates could have forced investors to restructure their portfolios towards assets with a lower return-to-risk ratio, and if some of this money comes from BTC, the demand for this asset would have decreased and also its price.
Likewise, Rallo clarifies that the fixed supply of BTC, in combination with a decrease in demand, causes a precipitous drop in prices. He also points out that other long-term investors could be motivated to withdraw their money from BTC in the expectation of a price drop, amplifying the downward movement generated by those short-term investors who liquidated their positions.
If right now non-confiscability is not a factor that investors are seeing as particularly valuable as they don’t think there is a prospect of confiscation, then to the extent that fixed income interest rates continue to rise as a means of suppressing inflation , BTC may continue to suffer in this context, because capital may continue to leave not only BTC but also other assets such as the stock market, to take refuge in fixed income, which is beginning to be more attractive.
Juan Ramón Rallo, economist.
How will the price of bitcoin recover?
Rallo also assured that nothing implies that BTC will return to the price of USD 69,000 reached in November 2021, since this price can be highly speculative, and could have been created by the expectation that its price would continue to rise. For BTC to recover this price another bullish speculative wave should be generated, or attract long-term claimants for this asset, in Rallo’s opinion.
Other analysts point out that if the price of BTC does not return to the support of USD 45,000, it could drop to around USD 24,000, as we recently reported in CriptoNoticias. Juan Rodríguez pointed out that while some whales have sold, for now there is still good support from investors who still buy bitcoin and hold it long-term.
On the other hand, some have taken advantage of this price drop as an opportunity to buy, as is the case of the government of El Salvador, which bought 410 BTC for USD 15 million on January 21.
As of press time, bitcoin (BTC) maintains a price of USD 34,800, according to the CriptoNoticias price calculator.