Governments around the world are growing increasingly concerned about slow economic growth rates and how they could affect financial stability in the coming months or years.
According to a report published by an analyst at OKEx, a leading crypto exchange with more than US$32 billion [AU$47.3 billion] in monthly trade volumes, an “inflation-hedging drive” in the face of economic stimulus measures could be the catalyst Bitcoin needs to resume its upward momentum.
In the United States, all eyes are on Federal Reserve Chairman Jerome Powell as his comments at this week’s annual global central banks’ symposium in Jackson Hole, Wyoming indicate the very real possibility of rate cuts in the coming months.
Powell noted that while the U.S. is “in a favorable place” it still faces “significant risks”.
“We will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective,” he told attendees.
Data provided by CME’s FedWatch tool shows a 95% chance of a quarter percentage point rate cut at the September Federal Open Market Committee (FOMC) meeting.
The likelihood of quarter-point rate cuts being introduced during the remaining FOMC meetings is also high, with a 63.7% chance at the October meeting and a 52.8% chance at the December meeting.
Many experts are predicting that if the U.S. central bank does slash interest rates, an unintended side effect will be upward pressure on “hard assets” such as gold, diamonds, and other commodities.
This scenario becomes even more likely as other central banks around the world have also decided to take easing measures.
The European Central Bank (ECB) is also planning a new stimulus plan for the eurozone economy while Asian central banks are working to increase stimulus on their respective countries through rate cuts.
If the Fed does cut interest rates, the unnamed analyst believes that three back-to-back rate cuts before the end of 2019 could easily see the price of Bitcoin surge to $14,000 by the end of the year.
To reach his conclusion, he looked at Bitcoin’s price action between this year’s June and July FOMC meetings.
It was during the July meeting that the Fed decided to cut interest rates by a quarter-point (25 bps), marking its first rate cut in 11 years.
Between the June and July meetings, the price of Bitcoin rose 12% against the U.S. dollar. Using this as a benchmark, the analyst writes:
“Assume that a 25 bps cut could give about 12% gain to BTCUSD, three more 25 bps cuts could send BTCUSD to $14,000 levels by the year-end, breaking the previous high near $13,800.”
“Given the high volatility in BTC prices and the building-up expectation of a 50 bps cut from the fed, the mentioned estimation seems rather be conservative,” he adds.
There are other factors to take into consideration, however, that could throw up roadblocks in Bitcoin’s upward path.
For example, the DXY Index shows that the U.S. dollar has been performing well over the past several months, which could make Bitcoin’s surge to $14,000 more difficult than expected.
On the other hand, factors like Brexit and the ongoing U.S.-China trade war could work in conjunction with rate cuts to increase the appeal of Bitcoin as a hedge against inflation to investors.
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