Negative Interest rates have been the emergency tools of the central banks. Several countries and central banks are planning to experiment with the unorthodox policies of implementing negative interest rates and this is making headlines more than ever. Investors may tolerate marginal negative yields on sovereign debt because it is a safe investment, and they may be forced by their investment mandate into holding it. Governments have perfected the art of covertly robbing citizens of their purchasing power, through inflation. Inflation has eaten away the return on bonds, resulting in negative real interest rates. Many politicians and CEOs of world’ leading banks have admitted that we are in a currency war and devaluing currency appeared as a strong weapon to force other countries to bend the knee. Deflation will be a natural signal to readjust market for solving real value debts but equivalently detrimental for the currency which when developed has inflation in its fundamentals. Using a simple inflation calculator, one can verify the global trend for themselves. For example, $100 in 1956 would be worth $937.44 in 2019. 100 Japanese yen would be worth 607.57 yen today, and 100 Australian dollars from 1949 would have the current purchasing power of about 3,002.63 AUD. Should the global trend toward currency devaluation continue, it may not be long until another gigantic bubble looms over the world economy. This time, dwarfing the bubble of 2008. If it bursts, no amount of easy credit is likely to save the day.
As negative interest rates require a more or less cashless society, they couldn’t be implemented in countries where cash-based payments are the norm. Sweden, Denmark, and Switzerland are all countries with negative interest rates — the almost complete absence of cash in the countries has made it easy to implement. However, 10-year mortgage deals in Denmark, negative-yielding bonds, bank closures and consolidations in Japan, and depositors were forced to move their money into alternative means of savings such as fiduciary call deposits, physical assets, or other safe havens. The problem is plaguing banks even in traditionally strong countries like Germany. A move to ban negative interest rates in Germany is likely to face some challenges. Financial institutions in the Eurozone are now forced to pay a subzero, -0.40% penalty on their deposits with the European Central Bank (ECB). And they are obliged to keep mandatory reserves there. Under these unfavorable conditions, 115 banks are already partially passing on the punitive rates to their private and business clients, an analysis conducted by the German financial portal Biallo shows. A total $17 trillion of global bonds are now negative and it’s rising at a rate of a trillion a week.
In this scenario, investors have no other option other than shifting their portfolio to more physical assets like Gold and Real Estate. Gold has been performing splendidly in 2019. Gold CFDs are up more than 25 percent year-to-date, and it appears that the international economic uncertainty is only fueling the growth. However, there is another alternative which is not correlated to traditional financial markets is something that makes it attractive to investors in times like these.
Bitcoin has no obvious parallels as an asset class. Bitcoin is a bit like a currency and a bit like a commodity and a bit like a stock — yet different from all of them. If you want an analogy, Bitcoin is like gold but a) before gold had a long history of value and b) with a fixed hard limit to how much could ever be mined Bitcoin is different. With a strictly limited hard cap and predictable daily output, the bitcoin supply cannot be manipulated. Central banks can’t devalue it. No-one can “print more.” At the beginning of August, when U.S. President Donald Trump slammed another 10% tariff on $300 billion worth of Chinese goods, traditional markets tumbled. Bitcoin, on the other hand, gained more than $700 in less than 24 hours, indicating that investors considered it to be a store of value and a hedge in tumultuous economic conditions. As the world moves to negative interest rates, bitcoin’s monetary policy and price-performance make it an appealing alternative.
Bitcoin’s volatility has always been argued and that needs to be addressed, but it doesn’t affect the coin’s ability to store value. Being the face of decentralization will make most people choose Bitcoin over other tokens, some of which may offer more stability or faster transaction times. When China let the yuan fall against the dollar, we saw a clear uptick in bitcoin. Although, this correlation is far from proven over the long-term. As the best-performing asset of the year, not to mention the decade, it’s getting harder to ignore bitcoin.
Gold and Bitcoin are both anti-fragile bets. If the current macro story ends badly, both will do well. Gold is definitely a hope you are wrong story. Bitcoin is more nuanced. A scenario where Bitcoin goes up 100x is likely to be scary and disruptive and bad for many assets, but there is also a hopeful scenario where Bitcoin gives people greater sovereignty over their data and other assets. What would happen if Bitcoin becomes an internationally accepted currency? Given that the number of bitcoins in circulation is limited, inflation will not be a concern and purchasing power would be retained. Interest rates would be market driven and negative interest rates would be impossible. Investors would be loath to pay for the security of sovereign debt, because cold storage of bitcoins has zero marginal cost. Governments could introduce a tax on all bitcoin holdings, which could have the same effect as negative interest rates. If banks start imposing negative interest on deposits then citizens will effectively lose a percentage of their savings every year. Holding bitcoin and other cryptocurrencies in such scenario could prevent people from being the victims of negative interest rates. Activities like these provide more motivation to adopt crypto and enjoy freedom.