Another Reason Crypto Plummeted Last Week
Spoiler: The Federal Reserve is worried about Inflation and may stop printing money
Last week we discussed the possibility that the massive crypto prices could be due to the Bitcoin hashrate dropping 18.10% after Kazakhstan turned off the internet for the whole country (read about it here).
Something else happened last week. On 5th January the Federal Reserve published the minutes from the Federal Open Market Committee (FOMC) December meeting.
What is the Federal Reserve?
The Federal Reserve (FED) is the central bank for the United States of America. It controls the production and distribution of US Dollars. As the US Dollar is the most widely used currency globally a case can be made the FED is the most powerful financial institution in the world.
What’s Has the FED Been Doing?
For a while now the Federal Reserve has been pumping billions of dollars a month into the system, this is called quantitative easing. The FED mostly does this by buying debt from the US government (Treasuries). The US government take the money the FED has given them and gives it out. Everyone likes receiving free money so the markets celebrated and valuations soared.
The problem is, if you keep pumping money you magicked out of thin air into the system you dilute the purchasing power of the all money in that system. This is called inflation. As the purchasing power of the money decreases people who have spare money will try to protect their wealth by buying things that can’t be so easily diluted (stocks & shares, property, gold and even Bitcoin).
So the FED met in December 2021 and their meeting notes were released on 5th January 2022. Turns out inflation was higher than they were expecting (what a shock). Inflation was also a hot topic in the polls and with the American mid-terms coming up the sitting government wants good ratings so probably lent on the FED to do something about the inflation they created.
Hello Quantitative Tightening!
Quantitative Tightening, or Balance Sheet Normalization (nice safe sounding name) is when the FED doesn’t flood the market with billions of dollars a month. Depending on your personality type, not having billions of dollars a month pumped into your economy might feel like a bad bout of asphyxiation.
The FED has been pumping $120bn a month into the system since covid began and a lot of this liquidity has found its way into assets and pushing up prices. If the FED is considering NOT pumping this money into the system… what does that mean for all those companies, properties and other things that have seen their valuations soar since the printing began..?
Well as there isn’t a ready flow of unlimited money available to buy things at any value it probably means valuations might not rise as much or possibly even drop a bit.
It’s important to remember that the meeting was just a meeting, nothing has happened yet and the only real change is that the FED is looking at slowing down the money printer a bit earlier than they had originally planned.
The Special Effect on Bitcoin
We don’t really know why crypto dumped as hard as it did. We think the Kazakh miners going offline might have had an effect and we think the FED meeting notes will have also affected sentiment. There is also a 3rd reason…
In January 2018 crypto went into a 3-year winter. Every man and his dog has been predicting a repeat ever since. The market is completely different this time round (there are more big institutional investors for one thing) but that doesn’t mean the mob won’t listen to the loudest most terrified voice.
What Happens Now?
We think this is a bluff from the FED. We feel that they are never going to stop printing (they can’t) and they are only talking about slowing the rate down in order to test the reaction from the market.
We must also remember that we have Nancy Pelosi’s trading orders (or at least her husbands). The Pelosi’s bought call options (the option to buy shares at a certain point in the future) worth millions for a lot of big tech stocks (Google, Salesforce, Roblox & Micron Technology) in December 2021. Call us cynical but as she is the leader of the house and isn’t the only influential politician playing the market, we don’t expect them to allow the FED to do anything too crazy that will jeopardise their profits.
Until Next Time
The Wealth Gap