There are many reasons to explain the recent bullrun in the crypto market. Expectations and fomo following the Bitcoin halving where "everyone" believes it will cause the price to rocket shortly after. US and EU stimulus packs in the trillion-dollar range causing legit fear of inflation and thus the search for safe stores of value.
With most western economies starting to see the light at the end of the tunnel, expectations are that interest rates will start to go up. Image credit: Minteer
But imo above anything else, a record low interest rate leaves people looking to place their money anywhere else than in their standard savings account. And no wonder. With an annual and likely increasing inflation of roughly 3,5%, getting 0,1% back on your savings means you're basically paying an additional tax on your wealth. Hence why people are also rushing into stocks and real estate, causing records gains across the board.
So what happens when it returns to normal?
Most of the modern world is projected to "come back to normal" sooner than previously expected. Vaccines have been rolled out faster than expected in the US and UK in particular, and will likely allow most European countries to have all vulnerable people and those in the high risk group vaccinated by the end of spring.
As a result, signals have recently been given by most central banks (in the US, Europe and Norway afaik) that an increase in the interest rate is likely to happen this year. As expected, those calls and the American 10 year bond yield increasing to the highest its been since January 2020 this week resulted in instant pullbacks in the stock market. Particularly affecting tech and growth businesses.
As interest rates closer to normal returns, people will be more tempted to take their gains made in the past few years. People who have been getting increasingly greedy in the search of better and better returns, thus ultimately being tempted to also pour some profits into Bitcoin and crypto to harvest some more.
But will it too see people take gains and become more conservative with their investments once the interest rates go back up? Obviously, it's hard to say as other factors can also come up in the same time period. But all else equal, it should result in some more people realizing their gains through selling. Additionally, if much of the recent gains in Bitcoin is from more institutional investment firms, those too are more likely to want to keep a fixed portion of their portfolios in bonds compared to more risky assets.
Of course, this is all speculation. But because an increased interest is likely coming soon, it makes sense to consider it.