In line with analysts’ expectations earlier this year, the US Federal Reserve (Fed) is beginning the process of shrinking its $9 trillion balance sheet, which has ballooned to exorbitant levels in recent years. This means that the bank will turn off the dollar-denominated printers and stop releasing excess supply as empty money to the market. Investors are wondering what this means for the cryptocurrency market, which has largely benefited over the past 2 years from almost unlimited reprinting.
The “Money printer go BRRRRR” period is ending and the Fed will close its printers
The cryptocurrency market and cryptocurrency analysts have differing opinions on whether the quantitative tightening (QT) process that began on June 1 will end a decade of unprecedented growth in the cryptocurrency markets.
In very simplistic terms, QT can be thought of as the opposite of Quantitative Easing (QE) or money printing that the Fed has been doing since the start of the Covid-19 pandemic in 2020. Under the terms of QE, more money is created and distributed, while the Fed adds bonds and other Treasury instruments to its balance sheet.
The Fed plans to reduce its balance sheet by $47.5 billion per month over the next three months. It foresees a cut of $95 billion in September of this year. Eventually, by the end of 2023, the balance sheet should be reduced by $7.6 trillion.
Analysts at major financial institutions, including Danske Bank, predicted that “the Fed printers will stop brrrrrrrring” in January, assuming at least four interest rate hikes this year.
Tom Matthews, head of communications at Australian cryptocurrency exchange Swyftx, believes QT could negatively impact markets.
– It is very possible that you will see the increase in market capitalization slightly truncated. The Fed is shedding assets faster and faster than many analysts expected and it’s hard to imagine this won’t have any impact on investor sentiment in the markets. – he commented.
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Printers strengthened cryptocurrencies. What now awaits Bitcoin and its derivatives?
Launched in March 2020, the QE program has had a huge impact on the cryptocurrency market. Data from CoinGecko shows that the cryptocurrency market capitalization was weakening in 2019 and early 2020, but at the end of March 2020 the dynamic bull market began as the reprint reached an almost limitless level. The total market capitalization of the cryptocurrency increased from $162. on March 23, 2020 to a peak of just over $3 trillion. in November last year.
Meanwhile, the Fed’s balance sheet has more than doubled from 4.17 trillion on January 1, 2020 to 8.95 trillion on June 1, 2022. This is the fastest growth rate since the last crisis. global financial institution that began in 2007.
As the CryptoWhale profile on Twitter notes, the cryptocurrency market has never benefited from Fed policy tightening. This is why the whales recently gave out their coins, and a potential collapse could be inevitable.
Bitcoin has never in its history been in a bull market as the Federal Reserve conducted quantitative tightening.
Clever whales have spent the last 12 months throwing their bags at dumb stores.
The mega crash is inevitable!
– CryptoWhale (@CryptoWhale) May 4, 2022
DeVere Group CEO Nigel Green believes market response to QT will be minimal because “it’s already priced in.” Green said there could be a “visceral market reaction” due to the unexpected speed at which QT is growing, but he sees it as a temporary jolt. “Furthermore, we expect the market to rebound soon, which means investors should position their portfolios to take advantage of this fact.”
Wage increases among American workers, particularly in the hospitality industry, have already been seen as labor demand remains high. Assuming wages remain high throughout the QT period, the United States could emerge from the economic downturn with less income inequality. The analyst service Economiser explained in a May 31 tweet that if people have more money in their pockets thanks to higher incomes, “the cryptocurrency market could ultimately benefit” from QT.
Interestingly, the strongest wage growth is in the hospitality and retail sectors.
This could mean that the United States emerges from this economic downturn with ↓ income inequality.
And if more people have disposable income, the crypto market could ultimately benefit. pic.twitter.com/J3DQ2DwnDZ
– Economiser (@economiserly) May 30, 2022
Swyftx’s Matthews added that if the markets have seen increased volatility recently, Bitcoin (BTC) could benefit as it now demonstrates its position as a benchmark asset. He noted that Bitcoin’s dominance is now around 47%, an increase of eight percentage points from the start of 2022.
– It can be interpreted in different ways. This suggests that market participants are trying to hold on to Bitcoin’s value, which means we could see a continued trend of weakness in altcoin markets if current market conditions hold. – he summarized.
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