Arthur Hayes, the co-founder of BitMEX and a renowned macro-analyst, has challenged conventional wisdom regarding the connection between Bitcoin and interest rates. In a recent blog post, Hayes argued that traditional economic theories might not hold up under the weight of the massive debt burden carried by the US government.
Hayes expressed the viewpoint that “central banks and governments are grappling with the use of outdated economic theories to address the unique challenges of today.”
This perspective comes in the context of the Federal Reserve’s move to increase its benchmark rate from 0.25% to 5.25% within the past year, aimed at curbing inflation and maintaining a 2% target. Despite the Fed’s apparent success, Hayes voiced concerns that inflation could persistently exceed expectations, given the substantial nominal GDP growth of 9.4% in Q3, in contrast to the 5% yield on 2-year US Treasury bonds.
Hayes underscored the remarkably high nominal GDP growth using data from the Atlanta Fed’s GDPNow forecast. Traditional economic theory would suggest that as the Fed raises rates, a credit-sensitive economy should weaken. This phenomenon was evident in financial asset markets, including stocks and Bitcoin, which experienced a downturn in 2022, eroding government capital gains tax revenues.
However, this decline in tax revenue led to increased government deficits, necessitating the issuance of more bonds to repay existing debt. In a high-interest-rate environment, this translated into higher interest payments to affluent bondholders.
Summarizing this sequence of events, Hayes explained, “To summarize: as rates rise, the government pays more interest to the wealthy, the wealthy spend more on services, and GDP continues to grow.”
As long as the economy continues to outpace the government’s debt obligations, Hayes believed that bondholders might seek more profitable “risk assets,” such as Bitcoin.
Hayes contended that the Federal Reserve’s efforts to combat inflation would ultimately favor “finite supply risk assets” like Bitcoin. He argued in a recent blog post that the Fed’s strategy essentially shifted money from one part of the economy to another. As long as the Fed’s approach to taming inflation remained uncertain, assets like Bitcoin were likely to experience long-term growth.
In a previous essay, Hayes had suggested that Bitcoin would thrive in response to a tightening Fed, whose actions might inadvertently increase the money supply. He asserted, “If the Fed believes that it must raise interest rates and reduce its balance sheet to quell inflation, it’s essentially self-sabotaging.”
Generally, analysts view lower interest rates as favorable for Bitcoin and other risk assets, as they create an environment where investors have the opportunity to speculate for potentially higher returns. In June, Coinbase analysts released a report suggesting that Bitcoin’s four-year cycles might be linked to central banks’ low-rate policies.
Hayes acknowledged the positive impact of low rates on Bitcoin’s price, characterizing the asset’s relationship with central bank policy as a “positive convex relationship.” He concluded by noting that the US and the global economy currently operate in an extreme environment.
