Higher interest rates may be adding money to the financial system rather than draining it, giving banks and wealthy investors more cash to put into assets such as Bitcoin, real estate, watches and wine, Flop Labs CEO Arthur Hayes said.
Speaking Saturday on The Rollup podcast, Hayes argued that markets focus too heavily on the price of moneyโthe interest rateโand not enough on how much money is being paid out to holders of bank reserves and short-term government debt. In his view, rate increases can raise income for those investors, some of which may then flow into financial assets.
Hayes estimated that a quarter-percentage-point increase in rates could add roughly $25 billion a year in income to banks and Treasury bill holders. He said banks hold about $3 trillion in reserves at the Federal Reserve, which pays interest on those balances. A 0.25-percentage-point increase, he calculated, would generate about $7.5 billion in additional annual income for banks.
He also pointed to roughly $7 trillion in outstanding Treasury bills, whose yields generally move with the Fedโs policy rate. A quarter-point increase could add approximately $17 billion a year in interest income for holders of those bills, according to Hayes.
โI estimate that for every 25 basis point hike, you raise $25 billion of extra liquidity,โ he said.
Hayes said much of that additional income goes to banks and wealthy investors, who are less likely than ordinary consumers to spend it on day-to-day goods. Instead, he argued, they may direct it toward financial or โhardโ assets in an effort to preserve purchasing power. โYou go and buy more of it because you just got a raise from the Fed,โ he said.
He said the effect could be especially pronounced in economies with high debt levels and a large share of borrowing tied to short-term rates. In such conditions, he argued, rate increases intended to combat inflation can add income to parts of the financial system and potentially contribute to further demand. Hayes cited studies of Brazil in the 1980s as an example.
The Federal Reserve raised its benchmark rate by a quarter point in September, bringing it to a range of 3.75% to 4%. It was the first increase since July 2023. At the time, Fed officials had indicated that another hike before the end of the year was possible.
Hayes said crypto investors should pay closer attention to the quantity of fiat money in circulation and the pace at which it is growing than to interest rates alone. He also played down concern about rising U.S. bond yields, saying that investment in artificial intelligence could continue regardless of borrowing costs. โThe AI companies are building God, and therefore you donโt care what the interest rate is,โ he said.
He added that the U.S. government would continue borrowing as needed, and argued that Europeโparticularly Franceโhas more debt than the United States.
Bitcoin was trading at about $62,100 early Sunday, its lowest level since August. The decline came amid continued weakness in the cryptocurrency market: Bitcoin was down more than 26% so far this year and more than 32% over the past 12 months.
Retail discussion on Stocktwits showed some improvement in sentiment, moving from โextremely bearishโ to โbearish,โ while conversation levels remained high. The platform reported that Bitcoin-related chatter had risen more than 531% over the previous week. Some users remained optimistic that the cryptocurrency could return to the $70,000 range in the coming week, while another described the recent selloff as โfabricated.โ
