- The Federal Reserve may be introducing tapering soon, which could impact Bitcoin
- Bitcoin has been irreversibly plugged into the traditional finance model in recent years
- What does Federal Reserve policy have to do with Bitcoin?
There has been lots of talk of interest rates and tapering this week, and Bitcoin’s name keeps cropping up in relation to it. For those who don’t know anything about traditional finance and monetary policy it can be confusing to understand what the relationship is, so here’s a quick and dirty overview to give you an idea.
Bitcoin Now Part of the Traditional Finance Model
The issue of tapering has to do with Federal Reserve monetary policy, which is now inextricably linked to Bitcoin. Bitcoin is now seen as a risk-on asset that represents a good hedge to dollar-based instruments. These instruments work fine when there is restraint in the amount of money printing going on, but when crises such as the pandemic hit, money must be printed to keep the economy going – in the case of the coronavirus, some $6 trillion worth.
At the same time, interest rates are reduced or kept low, meaning that money is cheap to borrow, leading to speculators borrowing money to buy stocks (and bitcoin) while the conditions are good. This has seen Bitcoin hit all-time highs of $69,000 this year. However, there has to be a time when the music stops, and that time could be coming.
Could Fed Meeting End Bitcoin Bull Run?
A Federal Reserve meeting today will decide whether the agency starts to move faster in winding down its money printing in the form of bond buying, while at the same time also potentially signalling when it will consider raising interest rates again, which could be as soon as next year. This will give investors an incentive to leave risky vehicles such as Bitcoin and head back into the dollar, which has shown signs of reversal this year following an 18-month decline.
This is one example of how institutional investment is bad for Bitcoin and reflects just how much the space has changed in the last five years.