America’s central bank is once again expanding its balance sheet, this time through a “disguised quantitative easing program,” and crypto experts say it could propel bitcoin to new heights.
The US Federal Reserve’s balance sheet includes a large number of distinct assets and liabilities. When interest rates begin to rise, the Fed pumps more money into the system by purchasing treasuries, which means the banks have more cash available to lend and lower interest rates, according to a CoinDesk report.
In October, the Fed’s assets grew by over $162 billion to register the biggest monthly rise since 2008.
Popular analyst @Rhythmtrader hinted this was a sign of impending turmoil, the kind bitcoin is supposed to be a haven from, in a November 7 tweet.
It took a decade for bitcoin to grow to $166 billion.
It took a single month for the Fed to print $163 billion.
— Rhythm (@Rhythmtrader) November 7, 2019
Furthermore, $270 billion has been reportedly added to the balance sheet since September 11, which implies an average daily growth rate of $5.8 billion. As of November 15, the Fed’s total assets were $4.04 trillion, according to the Federal Reserve Bank of St. Louis.
The Fed again started buying treasuries after the money markets went haywire in September, pushing short-term rates as high as 10%, threatening to disrupt the overall lending system.
The Fed does not have the authority to enforce a particular federal funds rate and instead influences the money supply to keep rates in the target range, currently 1.5% to 1.75%.
Back in September, the target range was 1.75% to 2%. So, with rates spiking as high as 10%, the Fed was compelled to spring to action.
Fed Chairman Jerome Powell has repeatedly said that treasury purchases are not quantitative easing (QE), whereby the central bank snaps up government bonds to boost the money supply and buttress economic growth.
Experts, however, believe the central bank is in effect implementing round four of the QE program, following three rounds between 2009 and 2015, CoinDesk reported.
“The burst in the repo market is telling us that risk and debt accumulation are much higher than estimated and it has taken a disguised QE program to mildly contain it,” Daniel Lacalle, author of Escape from the Central Bank Trap wrote in an article for mises.org.
Meanwhile, Peter Boockvar, chief investment officer of Bleakley Advisory Group, editor of The Boock Report and CNBC contributor, is of the opinion that the markets view any increase in the size of the Fed’s balance sheet as QE.
The recent rally in the US stock market also indicates that investors are not buying the Fed’s rhetoric and are viewing the ongoing balance sheet expansion as QE, as pointed out by Sven Henrich, popularly known as NorthmanTrader.
Is bitcoin a hedge?
The popular narrative in the crypto markets is that bitcoin is effectively digital gold and a hedge against monetary and fiscal indiscipline.
Anthony Pompliano, founder and partner at Morgan Creek Digital Assets told CoinDesk:
“Bitcoin is headed towards a unique situation – lower interest rates, more QE, and the [miners’ reward] halving in 2020. These three events occurring near the same time should serve as rocket fuel for bitcoin over the next 2-3 years.”
Indeed, the top cryptocurrency’s monetary policy is fixed – the mining rewards are reduced by 50% every four years. Essentially, the pace of supply expansion is reduced by half every four years as opposed to major central banks, which have been expanding the money supply since 2009.
Looking ahead, the Fed is likely to continue expanding its balance sheet in the near future, as the money market is unlikely to return to normalcy any time soon, according to JPMorgan Chase. With bitcoin set to cut miner rewards next May, the bitcoin-Fed monetary policy divergence is set to widen further.
As Chamath Palihapitiya, a former Facebook executive and venture capitalist, said in July, bitcoin is the perfect hedge “against the traditional financial infrastructure.” He elaborated that if fiscal or monetary policy is wonky, as it arguably is now, having bitcoin is like “the schmuck insurance you have under your mattress,” Blockonomi reported.