The buzz around cryptocurrency never dies down, and its market dynamics frequently intersect with traditional economic strategies. There's one discussion that's front and center right now: the impact of Quantitative Tightening (QT) on the crypto world. And as we delve into this topic, remember the anticipated Bitcoin halving, which is right around the corner.
While there is acres of narrative on why markets are under pressure be it bond routs and interest rates rallying in wider markets, or equities staggering, it is easier to see through that a focus of the Federal Reserves money supply tightening actions.
These actions amount to locking up cash into less liquid and therefore slower moving assets. This is done by the Federal Reserve selling down some of its vast supply of bonds for cash the reverse of how it kept the economy on the rails by buying bonds for cash and flooding the global economy with hot cash.
QT has been a significant force in financial markets, primarily driven by the US Fed's monetary policy as well as many other central banks who moved to stem global economic disaster during the covid lockdown. In essence, QT is about retracting money from the system. For the cryptocurrency space, and Bitcoin in particular, the expansive money policies, like QE, have been a boon, enabling investors with easy cheap money to play with high risk assets and because of the excess of money looking for a home: win. But when QT takes the stage, it dampen the enthusiasm for risk assets and it drags on the crypto market as it does Equities.
But here's the twist, QT won’t go on forever and as the QT era ends, it will be a godsend for cryptocurrencies, because the drag on ‘fiat’ liquidity which draw on and drains Crypto will end and reverse when QE restarts.
Examining the Federal Reserve's balance sheet, one can see a clear trend of money being extracted. This is the ‘mother of all charts’ when it comes to markets.
However, this isn't a continuous process, as evident from the bailouts of the banking system on the meltdown of Silicon Valley Bank and Sterling and Silvergate Bank which saw a flip from QY to QE . QT's grip has been felt deeply, with US markets faltering and suddenly three banks collapsed and it was clear that the biggest most surprising failure of Siliconvalley Bank was no victim of Crypto, just ‘roadkill’ of the drying up of exactly the sort of hot money created by QE. Most would argue the failure of the Crypto banks were also directly linked to QT as were the other near miss bank failures that the cash pushed out by the QE bump in the QT trend, was used to prevent.
The key to the end of QT is held in the amount of cash held in the Federal Reserve’s ‘reverse repo’ system.
Here is a chart of the Reverse Repo market:
This system acts as a cash buffer, absorbing excess funds from banks who cant use what amounts to excess money. It's where liquidity waits, when the banks do not want to risk using it. It is the sort of excess money that creates inflation, but it is mopped up by the Fed which pays interest to sterilize it in their safe keeping. And guess what? When the Reverse Repo dwindles, it signals the approaching end of QT, because when it is gone there is no longer excess money in the system to push prices up. Looking at the chart that looks likely to happen around next spring, but let’s say next summer to be conservative. The end of QT will be a boost for Bitcoin and will coincide with the upcoming Bitcoin halving, potentially giving a double boost to Bitcoin's value.
In essence, the ebb and flow of cash through QT have profound implications for inflation and deflation. Yet, it's the end of QT and the onset of Bitcoin's halving that presents a potential surge for the crypto market.
To all crypto enthusiasts and investors, keep your eyes peeled for these two charts. They offer predictive insights into market behavior. The Fed, ever vigilant, will ensure there's enough money for the system to operate, but not to the extent that it causes high inflation. Given the US's influence, its policies ripple globally, making this a universal concern.
In the ever-evolving crypto landscape, macroeconomic policies like QT play a pivotal role. As QT winds down, probably by next summer soon after the Bitcoin halvening, the market will see renewed vigor. In a world where traditional and decentralized finance continually intertwine, understanding these crossroads becomes essential and the intersection of QT's conclusion and Bitcoin's halving is where you should set your sights.