It could be said that bitcoin was born in an era of low interest rates.
The world’s first decentralized digital currency was first mined and traded in 2009, at a time when central banks were using unprecedented stimulus in an effort to keep borrowing costs minimal. Following the financial crisis, these institutions cut their benchmark rates close to zero and engaged in asset-purchase programs in an effort to meet this objective.
Interest rates dropped sharply because of these efforts, and as a response, investors began reassessing available opportunities considering the low-yield environment.
What did this mean for bitcoin? For one, investors found the digital currency more compelling since the opportunity cost of foregoing interest-rate payments was lower.
In this low-rate environment, one could argue that investors saw bitcoin as having similar incentives to other safe haven assets, for example bonds. As long as the interest payments provided by these safe assets were modest, investors had little reason to seek them out over bitcoin.
However, should borrowing costs push higher, the digital currency could lose some of its luster. If interest rates start rising, it could draw many investors away from bitcoin and into interest-bearing assets like bonds.