Time for the big question: What will happen to crypto markets once quantitative tightening takes full effect and the Federal Reserve foregoes printing fiat money?
The US Federal Reserve is commencing the process of paring back its USD9 trillion balance sheet, which grew rapidly in recent years, in a move referred to as quantitative tightening (QT).
Experts Give Conflicting Opinions on the Possible Impact of QT on Cryptos
Analysts appear to have conflicting viewpoints about the expected impacts of QT, which is starting on Wednesday. Concerns are that QT will put to an end the growth reported in crypto markets in recent years.
QT May Reverse the Boom from Quantitative Easing (QE) of 2020
From a layman’s perspective, QT is the direct opposite of quantitative easing (QE), which the Fed engaged since the start of the COVID-19 pandemic in 2020. Under the QE, more cash is printed and redistributed as bonds, and other instruments are launched to maintain a balance.
The Federal Reserve is reducing its balance by USD47 billion every month in the next three months. In September, the Fed targets to reduce the balance by USD95 billion. The ultimate goal is to reduce the balance sheet by USD7.6 trillion by the close of 2023.
Pav Hundal, the manager of Swyftx, argues that QT could impact the markets negatively. He indicated that we might just see the growth in market cap shrink with a small margin.
According to CoinGecko data, the impact of QE, which was started in March of 2020, was pretty dramatic to the crypto market. The data shows that the market cap was pretty low in 2019 and early 2020 before a bull market commenced in late March 2020. In the course of the year, the market cap rose from USD162 billion around March to slightly over USD3 trillion by November.
During the same period, the Fed Balance rose from USD4.17 trillion on 1st January 2020 to USD8.95 trillion on 1st June 2022. It was the fastest rise since the last 2007-2008 financial crisis.
Nigel Green Says the Impact on the Market Will Be Minimal
However, Nigel Green, the CEO of the Financial Advisory firm DeVere, is of the view that the impact will be minimal since “it is already priced in.” He posited that a knee jerk reaction might be noted because of QT implementation speed but will eventually fade off.
Hundal appears in agreement with Green by indicating that although the market is experiencing high volatility, Bitcoin might benefit because it is showcasing its position as a bellwether asset. Today, Bitcoin dominance is around 47%, which is up 8% compared to the start of the year. However, he insisted that this can be interpreted in a number of ways.
“It does suggest that market participants are seeking to park value in Bitcoin, meaning we could see weakness continue to trend across alt coin markets if current market conditions continue to play out,” explained Handal.