What the expansion of the Federal Reserve balance for Bitcoin means
The US Federal Reserve UU. It is expanding its balance again and leading experts believe it could be a good omen for bitcoin in the long term.
The balance of the US Central Bank UU. It includes a large number of different assets and liabilities. When interest rates begin to rise, the Fed injects more money into the system by buying Treasury bonds. Banks, therefore, have more cash available to lend and lower interest rates.
In October, Federal Reserve assets grew by more than $ 162 billion to record the largest monthly increase since 2008.
The popular analyst @Rhythmtrader hinted that this was a sign of imminent agitation, of the kind that Bitcoin is supposed to be a refuge, in a November 7 tweet.
In addition, it is reported that $ 270 billion was added to the balance sheet since September 11, which implies an average daily growth rate of $ 5.8 billion. As of November 15, the total assets of the Federal Reserve were $ 4.04 billion, according to the Federal Reserve Bank of St. Louis.
The Fed intervenes in the money markets
The Central Bank again began buying Treasury bonds after money markets went crazy in September, pressing short-term rates up to 10 percent, threatening to disrupt the general lending system.
It is worth noting that the Fed does not have the authority to enforce a particular federal funds rate and, instead, influences the money supply to keep rates in the target range, currently from 1.5 to 1.75 percent.
When interest rates start to rise, pump or print more money to the economy. Banks, therefore, have more cash available to lend and lower interest rates.
Last September, the target range was from 1.75 to 2 percent. Then, with rates that shot up to 10 percent, the Fed was forced to jump into action, with the impression of fiat money.
Markets do not believe in the Fed
The president of the Federal Reserve, Jerome Powell, has repeatedly said that treasury purchases are not a quantitative easing (QE), so the Central Bank takes government bonds to boost the money supply and underpin economic growth.
However, experts believe that the Central Bank is implementing the fourth round of the QE program, or printing Fiat money, after three rounds between 2009 and 2015.
“The outbreak in the market of repos tells us that the risk and the accumulation of debt are much higher than estimated and an undercover QE program has been needed to contain it gently,” wrote Daniel Lacalle, author of “Escape from the Central Bank Trap “, article for mises.org.
Meanwhile, Peter Boockvar, investment director of Bleakley Advisory Group, editor of The Boock Report and a CNBC contributor, is of the opinion that the markets see any increase in the size of the Fed’s balance sheet as QE.
The recent recovery in the US stock market. UU. It also indicates that investors are not buying the rhetoric of the Fed and are seeing the expansion of the current balance sheet as QE, as noted by Sven Henrich, popularly known as NorthmanTrader.
The S&P 500 recovered for six consecutive weeks, starting from the second week of October until the second week of November. The index fell 0.33 percent last week just to record a new record of 3,154 on Wednesday.
BTC a hedge against monetary indiscipline?
The popular narrative in the crypto markets is that Bitcoin is effectively digital gold and a hedge against monetary and fiscal indiscipline.
Anthony Pompliano, founder and partner of Morgan Creek Digital Assets, reported the following:
“Bitcoin is heading towards a unique situation: lower interest rates, more QE and the reward of miners decreasing with halving in 2020. These three events that occur almost at the same time should serve as rocket fuel for Bitcoin in the next 2 to 3 years”.
In fact, the monetary policy of the main cryptocurrencies is fixed: mining rewards are reduced by 50 percent every four years. Essentially, the rate of supply expansion is reduced by half every four years compared to the main Central Banks, which have been expanding the money supply since 2009.
Looking ahead, the Fed is likely to continue expanding its balance in the near future, as the money market is unlikely to return to normal in the short term, according to JPMorgan Chase. With Bitcoin set to reduce the rewards of miners next May, the divergence of Bitcoin Fed’s monetary policy will be further expanded.
Therefore, it is not surprising that people like Cameron Winklevoss, founder of Winklevoss Capital Management, are extremely optimistic with BTC:
Bitcoin can benefit from Canton’s QE effect
The Cantillon effect refers to the change in relative prices as a result of a change in the money supply. He maintains that the injection of money (QE and other policies that boost inflation) may not change the production of a long-term economy. However, as newly created money travels through the economy, it affects different sectors of the economy differently.
For example, the expected increase in money supply due to QE or rate cuts applies first to financial markets. Simply put, the people who invest the most in the stock market are the first to benefit from inflationary policies.
By the time new investors enter the market, assets are already overvalued. In addition, saving becomes difficult with low interest rates and the fall in the purchasing power of the currency.
Therefore, a prolonged period of QE may force investors to diversify their investments in bitcoin, which is deflationary in nature, as analyst Pierre Rochard pointed out in August.
Backing Rochard’s vision is Gabor Gurbacs, director / strategist of digital assets at VanEck / MVIS, who told him the following, that both bitcoin and gold could benefit from the devaluation of the dollar led by QE and asset inflation.
Gurbacs said the following:
“The Central Banks that expand their balance sheets is a quantitative easing in disguise. Indeed, the Central Banks buy government bonds and expand the repos market program with the intention of keeping money markets under control. Bitcoin and gold can provide an alternative and potentially coverage against catastrophic failures in centrally controlled banking systems. “
Some may argue that BTC is not an active refuge and tends to track actions more closely.
“The previous bullish runs of bitcoin were characterized by a gradual decrease in the volatility of the stock market. For example, we have noticed its inverse relationship, although imperfect, with the VIX index over longer time horizons (that is, the increase in 2017), “according to analysts at Delphi Digital.
Even if we consider that BTC is a risk asset, the Fed’s QE still seems to be a bullish price development.
The Central Bank conducted three QE rounds between 2009 and 2015, during which the S&P 500, a benchmark for risk assets worldwide, recovered by more than 200 percent. Gold, a classic safe haven asset, increased from $ 800 to $ 1,921 in the three years until 2011 only to fall back to $ 1,050 in December 2015.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.