US Pumps Trillions Into Economy, Will It Impact Bitcoin Price?
Policymakers around the world have created unprecedented amounts of new money in an effort to stave off an impending recession, or worse: a total depression. In the United States, the Senate approved a $2 trillion stimulus package in late March, and the House of Representatives has now accepted a proposition from House of Democrats for another $3 trillion intended to ease the needs of Americans who are suffering an unemployment rate of around 15%. As a response to COVID-19, the Federal Reserve has undertaken a series of quantitative easing unparalleled in its history. How will these actions of the U.S. government influence the price of Bitcoin?
As the monetary body responsible for controlling the world’s reserve currency, the Fed uses quantitative easing as a way of sustaining the economy with fresh liquidity. Having total control over money printing allows the Fed to print as many dollars as it wants, which it then pumps into the financial system by purchasing assets on the open market.
Market observers remember the consequences of the Great Recession in 2008, when the Fed brought up more than $1.2 trillion worth of assets in just four months as a means to inject fresh capital into the markets. However, the scale of quantitative easing undertaken in the wake of the COVID-19 crisis dwarfs anything done before, with the Fed putting no limit on the amount of money it is going to infuse into the system.
Over the past 2 ½ months, the Fed has bought about $2.8 trillion worth of assets. Unlike in the aftermath of 2008 when the governing body limited its asset purchases to secure U.S. Treasury bonds, this time it decided to buy even riskier assets like corporate and municipal bonds as well.
What should crypto investors expect?
U.S. bailout money is aimed at assisting public companies and preventing shareholders from losing their value. This new money may inflate the cost of assets, but since most Americans don’t own assets, the only result they will see is a weakening purchasing power. Beni Hakak, the CEO of LiquidApps, sees an opportunity for Bitcoin (BTC) to prove its store of value narrative:
“The COVID financial crisis is the first crisis that Bitcoin is experiencing as an asset class, and while some expected it to perform similar to gold, it led to a sharp decline in Bitcoin’s price. As the world economy has started to open up, Bitcoin has recovered quite nicely, outperforming the S&P since their respective lows. With the Bitcoin halving behind us, an event that has historically been followed by a bull run, it will be interesting to see if Bitcoin can gain acceptance as a hedge against inflation and a store of value.”
Quantitative easing vs. quantitative hardening
The apparently unlimited money printing represents a harsh contrast to the Bitcoin halving, an event which occurs once every four years and cuts down Bitcoin’s issuance by half. For crypto enthusiasts, this is further proof of Bitcoin’s status as the “hardest money in the world.” Bitcoin’s provable scarcity is attracting attention from average investors and users concerned about money printing and the possibility that it may lead to runaway inflation.
While the system may be “baked” with transparency and non-regulations, Avi Rosten, a product manager at CryptoCompare — a crypto data and research platform — states that through his monitoring he is seeing that the market is fluctuating severely. The high volume means distrust, noting big fluctuations in the U.S. stock market between March 12 and March 13 when CryptoCompare recorded 11,000 trades per second. Rosten says everyone was leaving risk-on assets to the U.S. dollar with Bitcoin as no exception. He added that it is about time for Bitcoin to show its value as an asset as all eyes are on it:
“We are likely seeing increased interest due to the excitement surrounding the Bitcoin halving, as well as record spot exchange volumes. Our April Exchange Review found that April 30th saw the second highest spot volumes in crypto history.”
The U.S. may be at the epicenter of the financial storm, but it doesn’t mean that other economies aren’t suffering it. Quantitative easing measures such as the recently proposed $3 trillion have caused currencies such as the Brazilian real, Mexican peso and South African rand to lose over 20% in value to the dollar since the beginning of the coronavirus crisis.
The uncertainty after the mid-March crash pushed Bitcoin into the place where gold has usually been. While markets are slowly regaining their losses, many countries are facing a second wave of the coronavirus, pumping the breaks on the recovery process.
A throwback to the ’70s?
The year is 1973, and an oil crisis sends shockwaves throughout global markets. Governments, especially in the U.S., print money fiercely in order to stimulate the job market. Attention is diverted to scarce commodities such as gold since investors want to hedge against the risk of rising inflation.
While this picture of uncertainty nicely fits the present-day situation, it also relates well to the economic condition of the 1970’s. The decade, which began with the U.S. abandoning the gold standard entirely, ended with a crippling 13.3% annual inflation in the country, even as wages and economic growth trended sideways. A combination of stagnant growth and rising inflation, or “stagflation,” pushed gold into the limelight as an inflation-resistant store of value.
Getting back to the present, fiat currencies are expanding their supply at the same time as the Bitcoin halving. With inflation fears beginning to flood the markets again, assets with provable scarcity are regarded as well-positioned. Mati Greenspan, an analyst and the founder of Quantum Economics, believes that after the large-scale quantitative easing rollouts undertaken by the U.S., Bitcoin will sustain its price and preserve its future value due to its low supply:
“It [Bitcoin] acts as a hedge against inflation like gold and silver. So if the likely scenario of this money creation happens to induce inflation, then it’s very likely that gold, silver and Bitcoin would hold their value against that currency and act as a valid hedge.”