01 Jul 2020 #Bitcoin
The US Federal Reserve recently announced an “unlimited” quantitative easing plan. Many participants in the cryptocurrency sphere were very happy, they say that due to the zero interest rate, investors will massively switch to crypto. But how will this quantitative easing really affect the future of Bitcoin?
The goal of quantitative easing, or simply QE, is to make loans more accessible and give an impetus to the economy during the COVID-19 pandemic crisis. This policy has yielded good results in the past, and it is QE that will become the main weapon of central banks in the fight against a new recession.
However, many cryptocurrency users undeservedly criticize the policy of quantitative easing. Often, people simply don’t understand how it works and how it will affect the rate of bitcoin and other assets.
The position of most crypto enthusiasts can be summarized as follows:
“Malicious central banks will print a mountain of unsecured money and the fiat currency will depreciate. Everyone will finally understand that fiat is one big lie, and will switch to Bitcoin - the only really valuable asset. Mass adoption of cryptocurrency is close!”
But how does this optimistic forecast relate to reality? Is it true that QE and a zero rate will force investors to quit fiat and switch to digital currencies? To understand this, you must first understand how this monetary policy works.
When things are going very badly in the economy, the central bank should give it a boost: give business and consumers the motivation to produce goods, hire employees, spend money, buy apartments, and so on. One way to achieve this is to make loans cheaper.
The problem is that banks will not cut rates themselves during a recession. The central bank must provide the banks with resources so that they give out more loans, and at the same time stimulate lower interest rates in the economy so that people can afford these loans.
To do this, the central bank must first create additional liquidity. When we say that the Federal Reserve prints money, we are not talking about real paper banknotes. The central bank has a mechanism for creating electronic money from the air.
Having created liquidity, the central bank begins to buy securities from banks - usually government bonds. This demand from the central bank causes an increase in bond prices. And since the nominal rate of return on a security does not change, its real resulting yield falls.
If the Federal Reserve buys a huge amount of bonds, the price will rise so high that the real rate of return will fall to zero - and then below zero. Denmark, Switzerland and Japan, as well as the ECB, already practice negative rates.
As a result of the intervention of the Federal Reserve, banks have a lot of new liquidity that they can lend to companies and consumers. The amount of money in the economy is growing.
Moreover, the zero rate on bonds “drags” all other rates in the economy. Of course, banks cannot issue loans at zero percent: they need to somehow generate profits. But they lower rates on business loans, mortgages, interest on credit cards and so on. The availability of cheap money is designed to start a stopped engine of the economy.
Another potentially positive effect of QE is that the national currency depreciates, products become cheaper for buyers from other countries, and as a result, exports grow.
There is a negative effect: the purchasing power of money is reduced. As people spend more, inflation can increase. However, during the 2008 crisis, trillions of infusions from the Federal Reserve did not lead to a noticeable increase in prices. In general, the relationship between the zero interest rate and inflation is a complex and controversial thing.
Now let's look at the situation from the point of view of the investor. You currently have the following options:
Where would you invest during the crisis? The answer depends on your risk appetite. Among the different types of investors, only a small portion will be ready to invest large sums in bitcoin in the hope of high returns.
These investors will continue to buy gold, bonds and shares of major companies. They are well aware that bitcoin can grow in price at times. But they are still not ready to invest in an asset that could lose 40% of the value in one day. Whatever crypto evangelists say, Bitcoin is not suitable for hedging risks. For example, here is how the famous crypto trader Josh Rager answered the founder of the Gemini exchange Tyler Winklvoss:
Winklvoss: “It is from such risks that Bitcoin protects.”
Rager: “And so the BTC fell from 8000 to 3600 in one day. Protection is just perfect. Good, Tyler, you yourself understand everything.”
Such investors can invest part of their funds in Bitcoin. The rest of their funds will go to less risky assets, which can grow strongly when the economy recovers from the shock. An example is palladium, which increased from 90% from February 2019 to February 2020.
Such investors are already investing in cryptocurrency: these market participants already have Bitcoin, and now they are increasing their investments. Another thing is that these investors would have already bought Bitcoin without any pandemic.
These investors are most actively interested in bitcoin. They already know that price increases are expected after a halving in May. The largest increase in cryptocurrency investment will be in this group.
How many people will buy BTC precisely because of quantitative easing and low interest rates? Perhaps less than crypto enthusiasts expect. The following graph from Google Trends shows the number of searches for the keywords “buy Bitcoin”, “buy gold” and “quantitative easing”:
As you can see, interest in buying gold and bitcoin began to grow in March, when the COVID-19 coronavirus pandemic spread to Europe and the United States. The peak of interest in QE came on March 15, when the Federal Reserve reduced the refinancing rate to almost zero. Smaller peaks were on March 19, Bank of England announcement of a quantitative easing plan, and on March 23, new US QE measures.
The graph of interest in buying Bitcoin does not coincide with the graph of inquiries on the topic of quantitative easing. But it is approximately parallel to the line of requests "buy gold." At the same time, interest in Bitcoin is much lower than in gold. The only time that the number of requests about Bitcoin has reached the same level as about gold is when the BTC price fell below $5000 after cascading liquidation of positions on the BitMex exchange.
What conclusions can be drawn from this data? When quantitative easing measures were announced, many started looking for information on buying Bitcoin. But a much larger number of investors wanted to learn how to buy gold. It is clear that the desire to protect your money is now stronger than the desire to make money quickly.
This risk aversion is also confirmed by the behavior of companies that accept payments in cryptocurrency. Among the more than 220 clients of the payment provider Cryptoprocessing.com, many people prefer to immediately automatically convert crypto revenue into fiat, rather than store it in the BTC. The risk of theft of cryptocurrency has nothing to do with it: all customer funds are stored in reliable cold wallets. Rather, merchants simply do not want to keep Bitcoin on balance, no matter how high its potential profitability.
So, will the price of Bitcoin rise this year? Probably yes. But will a quantitative easing and a zero rate cause a massive exodus of investors from traditional markets to cryptocurrency? Hardly.
It is clear that this year we will see a large-scale redistribution of investment flows. Investors will withdraw money from oil, stocks and bonds, but only a small part of this capital will go to Bitcoin, at least in the next 3-4 months. Anxiety and fear reign in the market: such an atmosphere does not facilitate investment in risky assets.
BTC has a chance to gain the trust of a wide range of investors if its price grows steadily after halving. But if suddenly a short-term collapse occurs, which is always possible, frightened investors are more likely to invest in commodities with high growth potential, such as rare metals.
Of course, in 2020, Bitcoin can easily outperform most traditional assets in profitability. But the positive effects of halving and other internal forces will be the reason for growth, not QE, zero rate or coronavirus.
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