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The Fed cuts Interest Rates as the virus spreads

With the rapid spread of COVID-19 threatening to bloom into a global pandemic, the equity markets have responded with a nosedive. To combat a market meltdown and a potential recession, the Federal Reserve has cut interest rates by half a percentage point.

Today the Federal Reserve slashed interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis.

“My colleagues and I took this action to help the U.S. economy keep strong in the face of new risks to the economic outlook,” Fed Chairman Jerome Powell told a press conference in Washington on Tuesday. “The spread of the coronavirus has brought new challenges and risks.”

In a sign of how skeptical investors are that rate cuts will be an effective tool in combating the economic damage caused by the virus, U.S. stocks only rallied briefly after the surprise announcement.

Still, it is hoped that the Fed rate cut will not only help to stabilize the stock market – and it could also lead to new money flowing into Bitcoin ahead of the halving.

The first cut is the cheapest

Following a pullback in the global economy and a falling stock market, the Federal Reserve slashed interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis.

The S&P 500, which measures the price performance of the 500 largest US companies, is down by over 12 percent since its most recent high of $3,386 two weeks ago. Additionally, the index experienced its worst week since the Global Financial Crisis at the end of February.

Conversely, the 10-year US Treasuries are trading at all-time low yields, which means that there was a flight to safety out of stocks into safe haven assets following the Center for Disease Control and Prevention (CDC) warning about the potential impact of the coronavirus.

“It’s not a question of if this will happen but when this will happen and how many people in this country will have severe illnesses. […] Disruption to everyday life might be severe,” said Nancy Messonnier, a CDC official.

“Everyone’s” favorite safe haven asset gold (XAU) spiked briefly to a seven-year high of $1,665 on February 24, before trading down again to $1,592. Year-to-date, gold is up by five percent.

Interestingly, while bitcoin (BTC) is often touted as a safe haven asset akin to gold, the price of bitcoin correlated with risky assets in the past two weeks and dropped by around 14 percent to trade just under $9,000 at the time of writing.

A rate cut by the Fed could move investors away from low-yielding, low-risk assets back to “risky” assets as the risk-reward ratio would look more enticing again. Despite bitcoin’s safe haven attributes, the digital currency can still be classified as a risky asset. At least, judging by its most recent correlation with stocks.

Therefore, a Fed rate cut could push returns-hungry investors into BTC.

Halving or haven?

Since the start of the year, the value of Bitcoin has gone up by over 20 percent. Pundits have largely attributed this rally to investors positioning themselves ahead of the upcoming Bitcoin block reward halving, which has historically always led to substantial market rallies as a result of a slowdown in supply.

Additionally, some believe that the rally has also been driven by the demand for a safe haven asset that is uncorrelated to stocks and bonds.

While it is impossible to determine investor’s motives for buying bitcoin, what is clear is that bitcoin is back in vogue in 2020.

How the effects of the global coronavirus epidemic will play out in the crypto markets remains to be seen but as digital gold and as an alternative currency, bitcoin looks well-positioned to withstand the potential storm ahead.


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