U.S. Treasury Secretary Janet Yellen said today that interest rates may "have to go up a bit" to prevent the US economy from overheating – and that bucket of cold water has caused markets to react. Bitcoin was no exception, dropping 7% after Yellen's comments.
Yellen said today in an interview with The Atlantic that a change of course may be necessary due to higher levels of government spending.
"Interest rates may have to go up a bit to ensure that our economy doesn't overheat," she said. "Even if additional spending is relatively small, relative to the size of the economy, it could cause some very modest increases in interest rates to achieve this reallocation."
Yellen, a critic of Bitcoin named Treasury secretary in January, added that President Biden's heavy spending would benefit the economy.
So, where does Bitcoin and the crypto world come into all this? Markets plummeted, including Bitcoin and the US dollar hit the session high.
Why the settlement? If interest rates rise, investors could theoretically be less inclined to look at alternative assets – like Bitcoin. This is because interest-bearing investments, such as bonds or debt-based instruments, would be more attractive.
Lower interest rates tend to go along with higher inflation, in turn making Bitcoin a hedge against the potential devaluation of the dollar.
Although Yellen said "modest", it doesn't mean anything that dramatic. "A modest increase in interest rates would likely have a modest impact on yields on fixed-income securities, pushing them upward," Charles Bovaird, an analyst at Quantum Economics, told Decrypt.
"This could make interest-bearing bonds more attractive, which would make them more attractive compared to digital currencies like Bitcoin and Ethereum."
He added: "Anyway, I don't think that a 'modest' increase in interest rates would have a big impact on cryptocurrencies like Bitcoin and Ether."
* Translated and edited with authorization from Decrypt.co