- Bitcoin price has been in a strong downward trend.
- The Fed is expected to start quantitative tightening policies.
Bitcoin price recovery has stalled as the financial market enters a new normal of high-interest rates and quantitative tightening. After rising to $32,237 earlier this week, Bitcoin has dropped to around $30,000 while the fear and greed index remains at the extreme fear zone.
Fed starts QT
Cryptocurrencies and stocks are in uncharted territories as the Federal Reserve moves to unwind its easy-money policies.
In more than a decade, these assets have thrived in a period when the Fed has been significantly supportive. Interest rates have remained at historic lows while liquidity has been abundant.
Now, the Fed has already hiked interest rates by 0.75% and signaled that the tightening process will continue. Economists expect that it will hike rates by 0.50% in the next three straight meetings. They also believe that it will push rates above the neutral point of 2.5% by December.
The most important part is what the Fed will do to its balance sheet. The bank has already doubled its balance sheet to a whopping $9 trillion during the pandemic. At the time, it was printing about $120 billion per month.
Now, the bank has started implementing a quantitative tightening policy. In it, it will do that by reducing its balance sheet by about $47 billion per month. In the coming months, it will double this amount to more than $97 billion.
How will Quantitative tightening impact Bitcoin prices?
With the world now in a new normal, there are concerns about the impact to Bitcoin prices. A common argument is that if Bitcoin price surged to an all-time high during a period of QE, then it is bound to drop when the tightening starts. This explains why BTC prices have crashed by more than 50% from their all-time high.
Learn more about how to buy Bitcoin.
In a note, an analyst at Capital Economics said:
“The main impact will come indirectly via the effects on financial conditions, with QT putting upward pressure on Treasury term premiums which, alongside a further slowdown in economic growth, will add to the headwinds facing the stock market.”
The same can be said about Bitcoin because of the close relationship that exists between stocks and cryptocurrencies. Therefore, there is a possibility that Bitcoin price will keep falling as the Fed embraces QT.
On the other hand, some analysts believe that Bitcoin will keep doing well since it has moved to oversold levels and that these issues have been priced in.
