There has been a growing argument that one of the reasons the price of Bitcoin (BTC-USD) has risen as quickly as it has is that investors are now moving money in and out of crypto-assets as they move money in and out of the stock market.
Additionally, if you assume, as I do, that stock market performance over the past decade or so has been driven by the largesse of the Federal Reserve, you can piece together an interesting argument that the price of Bitcoin would not have been as high as it was without the Federal Reserve filling the financial markets with lots and lots of money.
Let’s gather some of the data and see if this relationship has anything to back it up.
The Federal Reserve
The Federal Reserve has been aggressive enough to pump money into the financial system since the Great Recession.
Remember, Fed Chairman Ben Bernanke put us through three rounds of quantitative easing after the Great Recession, then followed up with economic policy designed to “err on the side of monetary easing.”
This political orientation proved to be very beneficial for the stock markets, as they reached many “new” all-time highs during this period.
Let’s look at how the Fed managed its securities portfolio during this period.
It was Bernanke’s call to stimulate consumer spending by driving up stock prices, thereby increasing consumer wealth. Bernanke’s efforts were very successful.
Wealth rose dramatically during Bernanke’s tenure, income/wealth inequality rose dramatically during Bernanke’s tenure as people invested more and more money in financial assets. However, the economy only grew a modest 2.3% a year while Bernanke was at the Fed and workers saw very little real wage growth.
You can see in the chart that a shift took place at the beginning of 2020. The COVID-19 pandemic hit and the Federal Reserve, under the leadership of Jerome Powell, reacted very aggressively to avoid a cumulative collapse of the financial system and economy.
A closer look at this period shows how Mr. Powell and the Fed reacted.
We can see that from the May-June 2020 period, the Fed began to accelerate its purchases of securities for its portfolio.
The steady increase after this period reflects the Fed’s policy of buying, outright, $120 billion worth of securities to add to its portfolio each month. The Fed only stopped this program in December 2021 and January 2022.
But, the Fed bought a huge amount of securities during this period.
The broad measure of money supply, M2, rose during this period, closely tracking the Fed’s monthly purchases of securities to hold in its portfolio.
In April 2020, the M2 measure of money supply began to closely track the rise in the Fed’s holdings of securities.
As mentioned above, during the period between the end of the Great Recession and the start of the covid-19 recession, investors came to trust the Federal Reserve’s support for the stock market.
The Federal Reserve pumped money into the economy and the stock market rose. And, as mentioned above, many new all-time highs were hit by the stock market during this time.
This “confidence” continued when the Fed injected money into the economy in 2020 and the economic recession, which was very short-lived, ended in early spring.
Let’s see what it looks like.
The trajectory roughly resembles the trajectory taken by the S&P 500 stock index.
Over the past two months, investors have begun to wonder where the Federal Reserve is going. Inflation has picked up and the Federal Reserve has been debating the future of monetary policy and how much it should restrict its purchases of securities to keep in its portfolio and how much it should raise its interest rate. leading interest.
This debate broke with the pattern of the past fourteen years or so, as the Fed was now talking about eliminating support for the stock market, even for a period of time. On the one hand, the Fed didn’t know how high inflation might get, nor did it know how long inflation might last.
The fact is, the louder the discussion got, the weaker the stock market got, and the uncertainty felt by the investing community was reflected in increased stock market volatility.
Thus, this chart picks up on two factors: first, the close relationship between M2 money supply growth and rising stock prices: and second, the shift away from confidence in the Fed as it began to tighten its monetary position. and stock market capping.
But this effect has also spread elsewhere.
Research over the past couple of years or so has indicated that movements in financial assets, like the stock market, are increasingly synchronized with movements in the price of cryptocurrencies, like the price of Bitcoin.
Bitcoin price was, of course, more volatile than stock prices, but the general correlation between the two had increased significantly.
This can be roughly seen in the movement of the price of Bitcoin over this period of time.
It can be seen that the initial rise in price roughly matched the rise in the stock market.
However, as initial concerns about rising inflation grew and the Federal Reserve may have to adopt a more restrictive monetary policy, the impact on the price of Bitcoin was even greater than the impact on prices. scholarship holders.
Of course, that’s what you would expect from a riskier asset.
One can also check what happened to the price of Ethereum (ETH-USD) and see that there was a similar response when it comes to the price of this asset.
Again, the greater volatility of this price is very evident.
However, it seems that the price of these crypto-assets has been very affected by all the talk around the Federal Reserve and its approach to the problem of inflation.
It seems that all the cash that the Federal Reserve injected into the financial system ended up in all sorts of financial markets. Over the past two years, I’ve written extensively on the rise and impact of blank check corporations (SPACs), venture capital, hedge funds, private equity, and more.
The Federal Reserve injected so much money into the economy and it spilled over here and spilled over there.
Apparently, this spilled over into the crypto world and allowed things like cryptocurrencies to look like they really could have some value.
I don’t believe, for the reasons I’ve provided in other articles, that the crypto market would have operated with the exuberance it has if the Federal Reserve hadn’t been so generous.
Cryptocurrency holders should give the Federal Reserve a heartfelt thank you.
But what if the Federal Reserve really tightens monetary policy?
What if the Federal Reserve really started to seriously raise its key interest rate?
And what if the Federal Reserve really started shrinking its balance sheet and pulling a lot of reserves out of the commercial banking system?
Is the stock market collapsing?
Is the cryptocurrency market collapsing?
So what will be the future of cryptocurrencies?