RESEARCH NOTE 17 September 2022
The Effects of High Interest Rates on Bitcoin Adoption Value Executive Summary
Bitcoin’s value is influenced by the interest rate environment. This is no different than any other asset. However, this research note attempts to explain and quantify that impact.
The degree to which interest rates affect bitcoin’s value was not knowable until recently, because interest rate levels and changes were small. Any interest rate effects were likely lost in the noise and volatility associated with bitcoin’s price.
Bitcoin’s price could fall proportional to increases in interest rates. An increase in high yield rates to 10% implies a bitcoin value of $14,000. An increase to 17% implies a value of $9,000.
Cane Island has strengthened its Adoption Curve Estimate (ACE) by incorporating interest rate volatility into the measure. This new metric will be reported periodically beginning October 1, 2022.
Bitcoin, Gold, and Interest Rates That most asset values move inversely with interest rates is a tautological foundation of finance. Since the invention of Bitcoin in 2009, interest rates have been relatively stable. Except for a period circa 2018, US short-term policy rates have been zero (Federal Funds Rate) and effectively negative (Wu-Xia Shadow Rate). A negative interest rate regime is one where the lender pays interest to the borrower. Federal Funds Rate and Wu-Xia Shadow Rate 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00
Big in Japan Japan is a good case study in how bitcoin is sensitive to the interest rate environment. Japan quickly adopted bitcoin for three reasons: 1. The Mt. Gox exchange, the first and largest bitcoin exchange, operated in Japan. At one point, 70% of the world’s bitcoin were traded though the exchange. 2. The Bank of Japan has maintained low-tonegative interest rate regime since 1995. Since 2010 the typical yield is below 1% on long-term bonds. Short term rates are often negative. 3. The name Satoshi Nakamoto probably resonates with the Japanese. Yield on 10-Year Japan Government Bonds 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40
Japan has one of the highest savings rates in the world (nearly 30%), as well as one of the oldest populations (median age 49) and longest life expectancies. This creates a high demand for fixed-income savings. By comparison, the US personal savings rate is about 5% with a median age of 39. When rates are low or negative, Japanese savers and pensioners must look beyond banks and bonds for a steady investment return. Equity is typically thought to be too risky for retirees, so many opted for gold. Some opted for cash, but rather than pay the negative rate to banks, they purchased fireproof safes and stored yen in their homes. Some chose bitcoin as a