How Could Reducing the Pace of the Fed’s Asset Purchases Affect Bitcoin?

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On December 15, 2021, the US Federal Reserve policymaker Jerome Powell announced that it would double accelerate reducing the asset purchases program from the market? – from $15 billion to $30 billion monthly. The purchases of US Treasury securities will be cut by $20 billion and mortgage-backed securities by $10 billion.

The Fed’s decision to accelerate the tapering of economic incentives will decrease cash injections into the US stock market, which will slow down its growth. In response to this event, the crypto market is in a relatively unstable state since the Fed’s decision may lead to a collapse of the US stock market, which will inevitably pull cryptocurrencies down with it.

In addition to the Fed’s actions impacting Bitcoin, the growing presence of institutional investors also increases correlation in the medium to long term. By the way, on the eve of the launch of the first Bitcoin futures ETF on October 19, 2021, the correlation began to strive for a two-year high, and it continues to be near the maximum marks.

Check the chart below.

Source: TradingView

At the same time, even if the cryptocurrency market crashes, it can be assumed that Bitcoin will recover relatively quickly and move to growth as occurred in March 2020, since the concentration of retail and institutional interest around Bitcoin is now very high. No significant signals are foreseen for this interest to wane in the foreseeable prospect.

During the Fed’s press conference on December 15, 2021, many important things were said that will affect the cryptocurrency market in the medium term. According to Fed Chairman Jerome Powell, the regulator is surprised that people who have lost their jobs during the lockdown are not planning to look for new jobs in the coming months, as they have good savings.

These savings were created due to the growth of ‘savings folks companies’? – ?that is shares of junk, unprofitable and over-indebted companies, the growth of the crypto market, the real estate market, and more.

The announced three-rate hike primarily hits unprofitable companies, while the giants will continue to grow and ‘drag’ the indices up. The Fed’s head said that in 2022 the growth of savings folks companies would come to an end – but to which ‘class’ of assets Bitcoin can be attributed is not entirely clear.

If Bitcoin belongs to the ‘folks’ companies,’ we are waiting for the crypto winter. The growth will likely continue if Bitcoin belongs to the giants. At the moment, it is clear that Bitcoin belongs to the class of risky assets, even highly risky assets. Since Bitcoin also loves the conditions of external soft financial policy, professional traders react by withdrawing liquidity from the market with any severe tightening of conditions.

Take a look at the chart below before moving on.

Source: TradingView

The above chart shows the current state of the Eurodollar futures market. This chart can be described as a hidden warning sign for the future policy of the US Federal Reserve. Actually, Jarvis Labs analyst Ben Lilly was the first to notice this warning sign. The essence of this idea is as follows.

The Eurodollar futures market is a kind of auction of predictions for future US Federal Reserve interest rates. A value of 100 means that stock market participants expect a rate of 0%, and a value of 98.850 means that investors expect an interest rate of approximately 1.15%.

The curves in the chart represent Eurodollar futures contracts with an expiration date each December from 2022 to 2026. Interestingly, contracts with a later expiration date (2025 and 2026) one way or another have an uptrend over a certain period – while contracts with an expiration date from 2022 to 2024, on the contrary, are falling.

This hidden warning sign suggests that if futures contracts expiring in December 2025 and 2026 – despite a local fall that began on December 3, 2021 – continue their uptrend, then hypothetically in three to four years, the Fed will have to abandon its rate hike policy and return to quantitative easing as yield inversion could occur. That is, this phenomenon is a thermometer of future expectations.

To summarize, even if the crypto market plunges into another crypto winter – which may happen between March 2022 and the summer of 2022, when the asset purchase program is completed and rates are raised – the second half of 2023 can expect a new Bitcoin bull cycle in anticipation of the next halving, which will take place around the spring of 2024.

Crypto investors should prepare for abrupt changes in the Bitcoin exchange rate and not give in to panic since from a macroeconomic point of view, Bitcoin still has the potential to grow to $90–150K. The only question is when this potential will be realized.

You also need to be prepared that double accelerated curtailment of the economic stimulus program will certainly provoke severe turbulence in the stock and cryptocurrency markets.

Baro Virtual is a family-owned team of enthusiasts who are sincerely passionate about exploring blockchain (on-chain) data and the cryptocurrency industry in general. In addition, our focus is on the analysis of financial markets, mainly using internal compression strategies, and the study of politics, business and economics. Baro Virtual is one of the top authors at CryptoQuant.

Featured Image: Shutterstock/Mia Stendal