Good morning!

Welcome to the first edition of TDA’s Finance Newsletter.

We created this newsletter because finance and economics matter, but too often the stories are made more complicated than they need to be. The goal here is simple: to bring you the financial and economic news that matters in a way that’s easy to understand and actually useful.

By way of introduction, my name is Max and I’m a 27-year-old economist. I like dogs, and I hate getting sunburnt. I gave my girlfriend the ick when I described myself as a “big democracy guy” a few weeks ago when we voted. Most importantly, I’m super passionate about making finance news digestible and accessible. And with that introduction, on to the news!

P.S. Given this is our very first Finance Newsletter, I’d love to know what you think. Hit reply to this email to give me some feedback!

Your questions, answered

We’re going to have a section every week where I answer your questions. Given this is our first edition, I’ve gone inside the camp and asked the TDA team for a question. This week, Zara asked: “Why is the price of Bitcoin at an all-time high?”.

First, let’s start with a definition. What actually is Bitcoin?

Bitcoin became the world’s first cryptocurrency when it launched in 2008. Basically, it’s a form of digital money.

The central idea behind Bitcoin is the ability to make payments without going through traditional banking channels. The digital currency runs via the ‘blockchain’, where all transactions are verified and connected in sequence.

Some people use Bitcoin because it’s anonymous, appealing to users who value privacy in transactions. Others may buy it as an investment, expecting its price to rise.

The price of Bitcoin

To understand why this latest price surge matters, you need to know that Bitcoin's price can occasionally move dramatically.

Looking at Bitcoin's price over the past 10 years shows it was relatively flat for a long time. However, since 2017, it has experienced several huge surges followed by huge crashes. The overall trend has been upward, but it's been an extremely bumpy ride.

What’s driving these price surges?

So what causes these surges? Unfortunately, there’s no one answer. These trends can be shaped by a combination of things, including:

• Speculation: When people buy Bitcoin, hoping the price will rise

• Institutional interest: When large companies, banks etc, start buying or accepting Bitcoin, it signals mainstream acceptance and then drives demand

• Regulation: Government law-making can dramatically impact prices

• Technology: Bitcoin has built-in mechanisms that affect how much new Bitcoin enters the market, which can influence the price

Other times, it can be a single event that triggers a change in price. For example, on 8 February 2021, Bitcoin jumped from around $US38,000 to $US46,000 after news broke that Tesla had bought US1.5 billion worth of Bitcoin and planned to accept it as payment (a decision later reversed).

Latest news

So why did Bitcoin hit an all-time high last week? Well, as we hinted, there were a few factors at play.

The first factor was a regulatory development: The U.S. Senate voted to advance legislation for a new cryptocurrency regulatory framework. This legislation is largely seen to be a step towards making crypto more mainstream

It wasn’t just the Senate decision. In April, there was a “halving event”. This meant Bitcoin supply was tightened, pushing up demand. Separately, more big finance companies have been buying Bitcoin. All these forces combined and pushed its price to an all-time high.

Now what?

At the time of writing, the price of Bitcoin remains high, sitting around $AU170,000, about the same as my willingness to pay for a Gracie Abrams concert ticket (where my Greople at?)

There’s no promise it’ll stay at this price though: The same factors that can drive prices up can also work in reverse and cause dramatic price drops. We’ll have to wait and see!

A message from EatClub

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With over 2,500 venues on the app, EatClub’s kind of like your mate who always knows the best cheap eats - except it lives in your phone.

Treat yourself without blowing the budget. Download the EatClub app here.

The week’s biggest finance headline, explained

Last Tuesday, the Reserve Bank of Australia (RBA) cut the cash rate to 3.85%.

Before we go further, here's what that actually means: The RBA is Australia's central bank, which means it plays a key role in managing the economy, including setting the cash rate. The cash rate is the rate of interest at which banks borrow money from each other. There is a special market where banks do this, called the cash market. The RBA runs this cash market, and importantly, sets the cash rate.

We usually refer to changes in the cash rate as the RBA raising or cutting interest rates, because the cash rate affects interest rates all over the economy. When the RBA raises the cash rate, it’s more expensive for banks to borrow money from each other, and they pass that cost on to you. That’s why the rate you pay on your home, car, or credit card may go up.

Why does the RBA do this?

The RBA's job is to keep the economy stable, unemployment low, and inflation (the rate at which prices rise) between 2-3% per year.

When inflation is too high, as it has been, one of the tools the RBA has is to raise the cash rate. This incentivises saving and makes it expensive to borrow money. And with less people spending and borrowing, there is less upward pressure on prices, and inflation eases.

On the flip side, if inflation is too low, the RBA can cut interest rates to encourage people and businesses to spend and invest more money.

And if things are ticking along nicely, the RBA can hold interest rates steady, and let the economy do its thing.

Last week, the RBA noted in its decision that the rate of inflation has now “fallen substantially since the peak” and “continues to ease”. So, let’s unpack how the decision to cut the cash rate to 3.85% actually affects you.

I only have savings!

If you don’t owe money to the bank (i.e. you haven’t taken out a loan to buy a house) and only have money sitting in savings accounts, this rate cut won’t dramatically change things for you. However, it will mean you are earning less interest on your savings.

Here's why: When the RBA cuts rates, banks usually respond by paying you less interest on your savings. It's like a chain reaction - banks earn less money from lending in the overnight market, so they pay you less.

For example, Westpac announced it would decrease the interest rates on some savings accounts by 0.25% per year. If you have $10,000 in savings and your interest rate drops from 4.5% to 4.25% per year, you'll earn about $2 less each month.

I have a loan!

If you have borrowed money and you do make monthly interest repayments - for a home loan, some other personal loan, or a business loan - then the RBA’s decision is likely to have a significant impact.

Here's how it works: When the RBA increases rates, it makes it more expensive to borrow money. When the RBA cuts rates, it makes it cheaper to borrow money. That’s because banks typically pass on some of those savings to borrowers by reducing the interest rates on loans.

Let's use a home loan as an example. Say you bought a $1 million house and borrowed $900,000 over 30 years at a variable interest rate. If your rate drops from 6% to 5.75% because of the RBA's cut, you'd pay close to $150 less each month in interest.

When the RBA cuts rates, it creates ripple effects throughout the economy that can indirectly affect your life in less obvious ways:

Housing market: Lower interest rates can push up the prices of houses. This happens because when borrowing money becomes cheaper, more people can afford to buy, driving up demand and prices.

Job opportunities: Companies find it cheaper to borrow money for expansion when interest rates are low. This can lead to more hiring and business investment, potentially creating more job opportunities.

Aussie dollar: Lower interest rates can make the Australian dollar weaker compared to other currencies. This could mean your #Eurosummer is more expensive.

Well, thanks for asking, imaginary TDA reader. Imagine you're a big finance company and you have $1 million sitting in an Australian bank account earning 5% interest. Then, the RBA cuts the cash rate to 4.5%, which means the interest you're earning on that money falls too. Meanwhile, you notice that an American bank is offering 4.75% interest. That’s more than you're getting in Australia now. So what do you do?

You sell your Australian dollars, convert them into US dollars, and deposit the money in the American bank instead. By selling AUD and buying USD, you're increasing the supply of AUD on the foreign exchange market, and increasing the demand for USD. That extra supply of Aussie dollars pushes its value down — making the Australian dollar weaker compared to the US dollar.

Imagine lots of finance companies and investors doing this kind of thing at the same time - unloading assets which accrue interest in AUD for better rates elsewhere. That’s a lot more supply of AUD and a lot less demand. This makes the AUD less valuable compared to other currencies.

What next?

The RBA will watch carefully over the following months to see if their rate cut is working as intended. The RBA did note that “uncertainty in the world economy has increased over the past three months”. It added that the recent tariff announcements made by U.S. President Donald Trump have caused “considerable uncertainty” and that “geopolitical uncertainties also remain pronounced”.

It said it will continue to pay close attention to the global economy. I’ll be here every step of the way to walk you through decisions and how they affect your hip pocket. If you have any questions about the RBA or its decisions, hit reply to this email!

A titbit for your group chat

This week, Reuters exclusively reported that adult-content platform OnlyFans could be sold to an investor group for an estimated US$8 billion. Here’s the OnlyFans business model: the four million creators charge their audiences for content, and then split that money 80/20 with the platform.

In 2022, OnlyFans generated $375 million in revenue - only one year later, they recorded $6.6 billion. As a reference point for that $8 billion price tag, Instagram was sold to Facebook for $1 billion. There’s been no official confirmation on the sale rumours yet, but we’ll keep you updated.

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