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Business News/ News / Shutting off fed ‘money printer’ leaves bitcoiners out of sorts
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Shutting off fed ‘money printer’ leaves bitcoiners out of sorts

Now the proverbial printer has been turned off, with the central bank raising rates and the price of the largest digital token crashing more than 50% this year, leaving the average investor caring little whether there is a finite amount of Bitcoin

Bitcoin trading volume spikes against weakening currencies Photographer: Chris Ratcliffe/Bloomberg (Bloomberg) (MINT_PRINT)Premium
Bitcoin trading volume spikes against weakening currencies Photographer: Chris Ratcliffe/Bloomberg (Bloomberg) (MINT_PRINT)

One of the most popular crypto memes during the Covid pandemic was about how the Federal Reserve was “printing" an endless amount of dollars -- “money printer go brrr," in Twitter parlance -- and how that enhanced the value of Bitcoin, which has a capped amount of tokens. 

Now the proverbial printer has been turned off, with the central bank raising rates and the price of the largest digital token crashing more than 50% this year, leaving the average investor caring little whether there is a finite amount of Bitcoin. 

What’s behind the demise of the meme is a steep reduction in money supply, or M2, which is a measure of the amount of money in the US financial system. 

“The logic would be that with the money supply, or M2, coming down, there’s less money floating around that could find its way into risk assets, and clearly cryptocurrencies have proven to be risk assets over the course of the last 12-18 months," Art Hogan, chief market strategist at B. Riley, said in an interview. “You’d suspect that would be a negative for some of the riskier edges of the investment universe."

That’s not how things were supposed to be. Bitcoin was created amid the 2008 financial crisis in response to what was labeled as rampant money printing. The thought had been that due to its limited supply -- capped at 21 million coins -- it would hold up its value much better when central banks or governments were instituting loose monetary and fiscal policies. The coin, in such an environment, wouldn’t be devalued, its backers argued.    

Because of that limited supply, a number of narratives formed around the coin, including that it’s an inflation hedge and a safe store of value. But 2022 has proven otherwise, Hogan said. “That’s the real problem," he said. “If you’re going to remove some of the punchbowl, which is the money supply that could ostensibly find its way into riskier assets, then clearly they’re all going to lose some sponsorship."

Lauren Goodwin, economist and portfolio strategist at New York Life Investments, points to the gold market as a parallel. Investors had perceived gold in a similar way -- as a central-bank hedge. When central banks resorted to quantitative easing, that raised concern even more so that an environment in which inflation is much more likely to fester was being created. And when that happens, the banks tighten the reins and gold prices evolve around this dynamic. 

“That logic was essentially applied to cryptocurrency in the last five or 10 years, but the reality is not so much that crypto is an inflation hedge but rather, much like gold has become, it evolves with central-bank liquidity," she said by phone. “So the reversal of excess liquidity in the economy from the Fed and other central banks has contributed meaningfully, in my perspective, to the lower appetite for digital currencies."

Ilan Solot, a partner at crypto-investment firm Tagus Capital, says the correlation between M2 and Bitcoin can be explained by at least two factors. The first relates to where Bitcoin and cryptocurrencies lie on the risk spectrum. Solot agrees that more liquidity in the financial system generally benefits riskier assets. “Higher money supply mechanically means the boats rise, and Bitcoin is one of the boats," said Solot.

But the second relates to inflation expectations and monetary policy. When the money supply rose last year, buyers expected that prices would soon follow, and that pushed some crypto proponents to buy the token with the idea of it being an inflation hedge.

Some of these investors, says Solot, bet that the Fed would not raise rates enough to combat inflation, and that it would instead prioritize other factors like economic growth. That narrative did not play out. Fed Chairman Jerome Powell issued three consecutive 75-basis-point hikes this year. He’s signaled there’s more to come.

A dropoff in the money supply then made an asset like Bitcoin less attractive to investors --even those who viewed it as a hedge against inflation. “You don’t want to buy your insurance when the house has already burned down," says Solot.

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Published: 09 Oct 2022, 08:59 PM IST
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