Bitcoin & Fed Tapering: Update Since December 15th Meeting
Welcome back.
First and foremost, the reason I haven’t been tweeting much is not that I turned bearish. I tested positive for Covid (probably Omicron) a few days ago and have been quarantining since. I feel like there’s a thick, spiky fishbone squirming in my throat and someone is performing a lobotomy on me at the same time. On the bright side, I’m glad because I feel like the symptoms would have been much worse had I not been vaccinated. Anyways, I'm going to keep this week’s newsletter short. I hope you can understand.
Last Sunday, we discussed the implications of inflation, tapering and interest hikes. Then this past Wednesday, there was a meeting in which the Federal Open Market Committee decided to double the pace of tapering. “Specifically, the Fed will reduce its monthly purchases of U.S. Treasury securities by $20 billion each month and its purchases of U.S. agency securities by $10 billion each month” (Source). By doing so, the Fed aims to end tapering by March 2022 instead of the previous target of mid-2022.
Some of the reasons that pushed the Fed to expedite their original timetable are “strong economic activity, especially labor market gains, along with rising inflation” (Source). But the important thing, as I reiterated in last week’s newsletter, is what comes after tapering. If rate hikes end up being the natural response to the end of the program as we expect, deflationary pressures will push individuals and businesses to enter risk-off mode. I have no idea in regards to its severity as it would depend on the Fed’s response.
But my take on it is that crypto is not going to be an exception. While we’ve been seeing some interesting divergences between stocks and crypto as well as between Bitcoin and altcoins, but the overarching correlation is still positive for both cases. It means altcoins will follow what Bitcoin does and the whole crypto market will react similarly to the stock market, at least for this market cycle. Therefore, it might be worthwhile to think about securing profits before the end of tapering. It’s indubitably on my mind.
This is by no means a guarantee. Investors could lose their risk appetite in traditional investments like stocks and gold but not necessarily for crypto, and we could finally see the great divergence we’ve been looking for. The great monetary shift. From the old to the new. From the analog to the digital. That’s certainly a possible scenario. Another scenario is hyperinflation pushing Bitcoin to new ATHs like we’re seeing in Turkey right now.
But I think those scenarios are less likely. Bitcoin, despite its increasing retail and institutional demand, is still a risk-on asset. Plus, USD is the world reserve currency and I doubt crypto is going to replace it anytime soon. We’re seeing a glimpse of the death of fiat through Lira, but USD is a different beast. That’s why I think we have to be less feverish for crypto and more mindful of the economic pressures that will put a damper on risk-on assets.
I remain macro bullish for the time being but I will be keeping a close eye on the inflation rate and whether or not the Fed will change its timeline again. But for now, the dreaded date is March 2022. Thank you for reading and stay safe and healthy out there. Cheers friends.