What effects do the Fed’s decisions have on the cryptocurrency market in 2022?

What effects do the Fed’s decisions have on the cryptocurrency market?

The Federal Reserve of the United States has begun the process of reducing its $9 trillion balance sheet, which has expanded in recent years, in a step known as quantitative tightening (QT).

Analysts from a crypto exchange and a financial investing business disagree over whether QT, which begins on Wednesday, would bring a stop to a decade of unparalleled development in the crypto markets.

QT may be thought of as the total opposite of quantitative easing (QE), or money printing, which the Fed has been doing since the outbreak of COVID-19 in 2020. More money is generated and dispersed under QE circumstances, while the Fed adds bonds and other government assets to its balance sheet.

For the next three months, the Fed intends to reduce its balance sheet by $47.5 billion per month. It intends to cut $95 billion from its budget in September of this year. By the end of 2023, it hopes to have shrunk its balance sheet by $7.6 trillion.

“The Fed is culling assets harder and faster than a lot of analysts had expected and it’s difficult to imagine that this won’t have some kind of impact on investor sentiment across markets,” Pav Hundal, manager at the Australian crypto exchange Swyftx said.

Since its start in March 2020, QE has had a significant influence on the crypto market. According to CoinGecko statistics, the crypto market cap fell in 2019 and early 2020, but a strong bull market began in late March 2020 when the money printer came online. Last November, the overall crypto market worth soared from $162 billion on March 23, 2020, to slightly over $3 trillion.

The Fed’s balance sheet grew 2.1 times in the same time period, from $4.17 trillion on January 1, 2020, to $8.95 trillion on June 1, 2022. Since the commencement of the previous global financial crisis in 2007, this is the quickest pace of rise.

Because QT is already priced in, Nigel Green, CEO of financial advice firm deVere Group, believes market reactions will be minor. Because of the unexpected pace with which QT is being implemented, Green expects a knee-jerk reaction from the markets, but he sees it as more than a wobble:

“Furthermore, we expect a market bounce imminently, meaning investors should be positioning portfolios to capitalise on this.”

Wage gains have already been noticed among American workers, particularly in the hotel industry, as labor demand remains high. If wages remain high during QT, the United States may emerge from the recession with less income inequality. In a Tuesday tweet, crypto market expert Economiser stated that if individuals end up with more money in their wallets as a result of better salaries, “the crypto market could ultimately benefit” from QT.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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