With central banks tapering or ending their bond buying programs -- and with some raising short-term interest rates -- the era of easy money is over. Already, the 10yr US Treasury yields have edged closer to 2.50 percent, almost a point higher than a year earlier.
That’s bad news for investors chasing bubble assets like Bitcoin and overvalued technology stocks, which are very likely to deflate, as was the case with dotcom stocks back in 2001.
Bitcoin has turned scores of investors, who bought into the digital currency early, into millionaires. But these investors could lose their millions faster than they made them, and then some, if the market momentum fades and eventually turns in the wrong direction.
That’s what usually happens to emotional investors—including Sir Isaac Newton, who lost a small fortune in South Seas Bubble.
Higher interest rates could put pressure on Bitcoin prices in a couple of ways. One of them is that higher interest rates raise the “opportunity cost,” of money used to buy Bitcoins. That’s especially the case for investors who buy Bitcoins on “margin,” with borrowed money, and are expected to face “margin calls” should the digital currency drops precipitously.
Another reason higher interest rates could put pressure on Bitcoin prices is that they will restore “credibility” to central banks and to national currencies they control. That will make alternative currencies like Bitcoin less appealing to the general public.
To be fair, it isn’t known whether an investment is in a bubble territory until the bubble bursts and investors lose a great deal of money. What’s known is that bubbles usually burst following several Fed interest rate hikes. Especially when Fed tightening begins from ultra-low levels.