After it implemented the most aggressive interest rate hikes in history, there is growing optimism that the Federal Reserve might finally pivot and begin cutting rates. Based on trends in the market and recent comments from the Federal Reserve chair, Jerome Powell, the first round of rate cuts could occur by this summer.
Should the Fed indeed follow through, new investment opportunities will present themselves. In such a scenario, one investment stands out as particularly promising: Bitcoin (CRYPTO: BTC). Here are three reasons why Bitcoin is my favorite investment if interest rates finally come down.
The lower opportunity cost asset
When interest rates are lowered, traditional investment options like bonds and savings accounts offer diminished returns. In such an environment, investors are incentivized to seek alternative assets that can provide higher yields.
Bitcoin, with its potential for significant price appreciation, becomes increasingly attractive as the opportunity cost of holding fiat currency or low-yield assets rises. In fact, Bitcoin's historical performance during periods of low interest rates demonstrates its potential.
Take the cryptocurrency's performance since the beginning of the COVID-19 pandemic as proof. When the Federal Reserve cut interest rates to nearly 0% to stimulate economic growth, Bitcoin experienced exponential growth. From the first rate cuts in March 2020, when Bitcoin was trading for around $5,000, it soared to more than $60,000 just a year later.
A valuable inflation hedge
Lower interest rates often accompany expansionary monetary policies aimed at stimulating economic activity. However, these policies can also lead to inflationary pressures on fiat currencies. The Federal Reserve has been hesitant to take its foot off the brake because it doesn't want to risk a resurgence in inflation.
From this angle, Bitcoin's decentralized nature and fixed supply become especially appealing, as they make it inherently resistant to inflation. With only 21 million Bitcoins ever to be mined, Bitcoin serves as a hedge against the erosion of purchasing power caused by inflationary fiat currencies.
Historical data supports Bitcoin's role as an effective inflation hedge. During periods of high inflation or uncertainty about future inflationary trends, investors flock to Bitcoin, driving up its price.
Again, we needn't look any further than its performance during the COVID-19 pandemic for evidence. As the dollar lost purchasing power at an unprecedented rate, Bitcoin took center stage as a viable option for people looking to preserve value.