The Central Bank of Brazil recently cut the Selic rate to 3.75% per year. The movement was a response to expectations about the impact of the pandemic of the new coronavirus (Covid-19) on the Brazilian economy. While the Brazilian interest rate falls to the lowest level in history, nations abroad are also practicing negative interest rates. The high demand for these securities that cause losses to investors rather than gains shows that the market has been waiting for years for a global recession, which can now be catalyzed by the Covid-19 pandemic. But what is the relationship between negative interest rates and cryptocurrencies?
Interest rates act as a stimulus for more money to circulate in the economy. They have been historically low in the current decade since the 2008 financial crisis, which caused a shock to global economies. The European Central Bank cut interest rates to below zero in 2014, dragging other countries in its wake. The Bank of Japan in 2016.
Initially, the cuts were adopted by central banks as a short-term remedy to stimulate growth in regions such as Europe. However, in recent years, they have become the rule, not the exception.
The U.S. is also heading in that direction. President Donald Trump had been pressuring the FED since last year to cut interest rates to stimulate the U.S. economy. After the new coronavirus crisis exploded, the U.S. central bank cut the rate to a range between 0% to 0.25%, which means that trillions of dollars were injected into the economy.
Demand for negative interest rates on the rise
Interest rates alone are not bad. But yet, what they mean about investors’ expectations about the world economy in the future. Generally, government bonds are the safest investments. But by the end of 2019, about US$ 16 trillion in global debt market value had negative yields. That is to say, investors are becoming so risk-averse – or seeking to protect equity – that they are willing to lose money to keep investing in these bonds. In other words, they predict a major recession.
There is also the concern that countries with negative rates will have less flexibility to respond to an economic slowdown with monetary stimulus. Central banks often seek to cut rates to boost economic growth, as lower rates will encourage savers to spend. If rates are already low and in some cases negative, the central banks may have less or no flexibility to help preventing a recession.
According to Bank of America, investors can still make money from negative yield bonds. That’s because bond prices rise when yields fall. Therefore, even if negative yields continue to fall, the price of the securities will rise and the investor can gain if he sells the bond before maturity.
Given this context of negative interest rates and an imminent recession, investors should think of cryptocurrencies as an instrument to improve the risk-return of their investments. In this sense, combining a portfolio of investments with bitcoin and other scarce assets such as gold, silver and platinum is an alternative to asset protection. Transfero, for example, has a fund that combines gold and bitcoin and seeks the investor’s protection for times of crisis.