How Fed decision will affect your bitcoin holdings

How Fed decision will affect your bitcoin holdings

17 September 2015, 13:46
Angeliqi N
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Like it or not, what the Fed decides to do later in the day will affect the value of the bitcoin that you hold, at least in the short term.

1) If U.S.-based holders of the cryptocurrency wish to spend the bitcoin, then the purchasing power of each unit is inextricably connected to the relative strength of the greenback, and interest rates are the key fundamental mover of currency strength.

In other words, if rates get higher, then the dollar will become more appealing and its relative strength will rise. That means, that anything that is principally priced in dollar terms - other currencies, commodities etc., will be relatively softer and their price in dollar terms will fall.

2) If, on the other hand, the central bank leaves the near-zero interest rate policy intact, it is reasonable to await some dollar weakness as a result.

If this is the case, then the beneficial impact on the price of bitcoin could well be exaggerated. Even with the increased demand for U.S. currency and a growing economy, easier monetary policy is bound to create some inflationary policy. Indeed, that is one of the Fed's aims - to produce some “moderate” inflation.

As Martin Tiller, analyst at Nasdaq, points it out, the problem is that inflation is more difficult to control than to induce. There would be no surprise if at least some of those people educated themselves as to the disinflationary nature and inherently limited supply of bitcoin and decided to hold some as a hedge against the possibility of inflation in the future. However, there will be no immediate surge in bitcoin ownership later in the week, no matter what the Fed does, Tiller says, but reinforcing the value of bitcoin as inflation protection cannot be bad for those that already hold the currency, he adds.

In spite of the possibility of a rise in the relative value, however, some bitcoin enthusiasts will be disappointed that even the price of their holdings will be impacted this week by the Fed’s actions. Many turned to cryptocurrency in an effort to get away from the Fed and Wall Street controlling their fortune, but until there is a realistic market in goods priced in bitcoin, that influence is unavoidable.

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