A rising interest rate environment courtesy of the Federal Reserve could hit deflationary cryptocurrencies hard, according to Robert Leshner, who spoke to Fortune about why he started a company called Compound.
Fed Expected to Hike Interest Rate
In the interview, Leshner points out that cryptocurrency has so far only existed in a low interest-rate US economy. As this starts to reverse, a series of rate hikes by the Federal Reserve put crypto in uncharted waters.
Currently, the odds of an increase in interest rates by 200-225 bps at the next Fed meeting scheduled for November 8th is over 90%.
Leshner feels that this could hit crypto markets hard. He says:
We’re finally starting to enter an environment of rising interest rates which crypto has never seen before and it’s going to be potentially challenging to the price of a lot of crypto assets just like it will be for a lot assets in general, including equities.
If we save money in a bank we can earn interest. The bank pays for this by lending our money to other people in return for more interest. This is obviously a very simplified explanation, and in recent times, the amount of interest that we can earn has been minimal.
Perhaps this is the reason nobody has asked the questions, “Why can’t we do the same with our crypto-assets? Why will nobody pay to hold our bitcoin?”
To rectify this, self-proclaimed interest-rates guy, Leshner, formed the company, Compound. It allows token holders to store their cryptocurrency and earn interest.
Although not currently supporting bitcoin 00, it does list four tokens and is looking to include others. It is currently allowing users to vote on which stablecoin to add.
Stablecoins Are In
Leshner predicts an influx of stablecoins onto the market, claiming there could soon be more than 50. He finds it unsurprising that so many companies are vying to enter the space, due to the clear benefits for issuers.
The investors eager to buy these coins are essentially just lending the issuers money at zero interest. And often paying transaction charges for the honor. This is hard to say, but… wouldn’t they be better off going to a bank?
Compound provides an interest paying marketplace where listed currencies can be lent or borrowed. Leshner hopes that the increase in fiat currencies getting tokenized will drive traders and arbitragers to his site.
When questioned on the benefits of a marketplace like compound, over the already established forex markets, he had this to say:
The advantage of tokenization is it brings transparency and programability to currency. When dollars are open to blockchain there’s so much more innovation that can occur.
Will rising interest rates hurt deflationary cryptocurrencies? Share your thoughts below!