The global economy is arguably experiencing a downturn similar in part to the global economic crises of 2008. The current meltdown which has pushed some nations into economic recession was spurred by the COVID-19 pandemic, a highly contagious viral disease that originated from Wuhan, China. The pandemic crippled businesses, international travels, and the global supply chains as many had to adhere to intermittent lockdowns targeted at stemming the spread of the virus.
While the world fights to return to normality following the pandemic, the financial ecosystem as being driven by each country’s apex (or central) bank has had to make tremendous adjustments to keep the money flow balance to sustain businesses. From the observations seen in the past months, a ton of the monetary policies being rolled out by these central banks has formed the basis for many nascent markets such as the cryptocurrency industry to take a plunge.
A typical example is a continuous rollout of cash to strained citizens to serve as a stimulus package to help reduce the harsh pangs of the coronavirus pandemic. These stimulus packages awash most economies with excess cash, which correspondingly resulted in the plunge of the purchasing power of fiat currencies owing to the ensuing inflation. Many people turned to cryptocurrencies like Bitcoin (BTC), which helped push the coin’s price beyond $40,000 in the past days.
Recovery Measures by the Feds: Negative Interest Rates and Implications
The move to cut interest rates below zero by federal authorities in different countries is one of the most underrated bullish factors that flashes the revolutionary potentials of Bitcoin and Decentralized Finance (DeFi) applications aiming at overturning the tenets of modern traditional banking.
While there are many implications of a negative interest rate, it should be understood that governments make this move to help encourage the populace to borrow more money at no cost and with the possibilities of being paid rather than a commitment to pay interests on the borrowed funds. This strategy is usually employed to encourage engagement in productive economic activities that can help resuscitate an ailing economy.
The involvements of banks who need to make profits while the negative interest policy is in effect somewhat complicates the arrangement as they must also develop ways to make money. As such, they tend to pass on charges to the retail customers and the public in general for depositing their cash as well as other banking activities. This makes the negative interest rate scheme antagonistic in productivity, as some (the lenders) are favored at the expense of others (general banking customers).
In the wake of the coronavirus, many countries including Denmark and Sweden have already embraced negative interest rates and there have been increasing calls to implement the same policy in the United Kingdom to fast track the nation’s recovery effort.
According to a report by The Guardian, Silvana Tenreyro, one of the nine members of Threadneedle Street’s monetary policy committee, is one of those advocating for a negative interest rate in the UK.
“My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation. Cutting bank rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus,” she said in a statement.
The Bitcoin and DeFi Way
While the existing monetary and economic landscape appears to be crumbling, Bitcoin and other digital assets are serving as investors’ delight, owing to the strength of their fundamentals in providing similar and better services as traditional financial institutions.
DeFi projects such as Aave, Maker, and others are providing comparative higher yield interest lending service that is made possible by well defined and functional smart contracts that have attracted over $21 billion in assets locked, according to DeFi Pulse.
Conservative investors with a little faith can take advantage of investing in Bitcoin with its highly attractive annual yield rate (over 300% in 2020) or by embracing DeFi offerings, as either of these two moves will bring more dividends than what today’s financial institutions are willing and can offer.