How Balance Sheet Reduction will Potentially Impact Crypto Markets

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• Bitcoin and Ethereum enter fall, seeming to adhere to the standard currency and stock trading norms;
• Drop in the market implies less money for individuals to play within the crypto market;
• The essential thing to consider is the rate of change in the money supply, the first derivative of the money supply;
• The Federal Reserve anticipates that the expansion of its balance sheet will drop to zero shortly
• Howard Marks: " If the FED were to recede, we would all take over as buyers."

After learning more about the Federal Reserve's more aggressive plans to increase interest rates this year, in part to contain inflation, the NASDAQ plunged more than 3%, and the S&P lost over 2% on Jan 19th But here's the thing: cryptocurrencies dropped as well. Bitcoin has fallen by 5%. Ethereum has fallen by roughly 7%, not to adhere to the standard currency and stock trading norms. But it seems that they do.

With predicted inflation gauges lowering, if that is one of the reasons individuals have been investing in cryptocurrencies, there is less motivation going long with crypto. As a result, cryptocurrency has behaved similarly to gold, and its price has fallen. For them, Bitcoin isn't about inflation; it's more about long-term gambling. The majority of the value propositions are for products available in 30 years. That implies the payout is a long way off.

On the other hand, long-term investments appear less appealing when interest rates abruptly climb in the here and now. In this regard, Bitcoin behaves similarly to the NASDAQ's high-flying tech stocks. They, too, had high ideas for the future, and investors became bored of the pie-in-the-sky thinking. Speaking of dashed hopes, a drop in the market implies less money for individuals to play within the crypto market. In reality, when things go wrong in the larger market, consumers will withdraw funds from cryptocurrencies to preserve themselves, exceptionally if markets are closed. In that sense, Bitcoin is similar to possibly the oldest investment - a wad of cash stashed under the mattress for emergencies.

When the COVID-19 epidemic was proven genuine and terrible on March 16th, Bitcoin suffered a correlation one moment and was slammed along with every other risk asset on the planet. When the global reserve currency (now the US Dollar) falls, investors on the margin rush to sell whatever they own, creating a "correlation 1" moment when all risks assets fall together. Everything is at stake. Once the dust has settled and the anxiety has subsided, only then will assets begin to move in more unpredictable ways. During the first three months of the year, the price of Bitcoin fell by 38%. Many individuals were put to sleep, whether by their own free will or the actions of others. When the cost of an asset reaches a threshold where traders feel compelled to sell, this is known as a mental stop-out, meaning leverage provider will forcibly close positions to protect part of the collateral.

While affluent people who control giant trading firms can sustain a significant decline in the value of their investments, the lemmings that follow them are unable to do so. The asset management business is content to invest in cryptocurrency as long as the employees keep well-paying jobs. However, if external circumstances necessitate a decrease in their crypto allocations, they will not hesitate to liquidate their holdings — regardless of the severity of the loss.

The EuroDollar's strength is a constraint on the actions of institutional investors. That is, dollars kept outside of the United States' domestic banking system. In essence, the globe is running out of cash. When the dollar's value declines, credit grows, and financial assets are pleased with themselves. Credit contracts and financial support are given a depressed expression in times of rising dollar value. See the Alhambra Investments blog for a more in-depth overview of how this market works. Therefore, if institutional investors are Positive Paulines or Debbie Downers, the essential thing to consider is the rate of change in the money supply, the first derivative of the money supply.

Using its "magic money printer," the Federal Reserve, for example, nationalized the corporate bond markets in March 2020 while simultaneously saving the US Treasury market by bailing out a slew of highly leveraged macro hedge funds in April 2020. The above actions directly resulted in a significant increase in M2 percent growth. The Fed's balance sheet expansion, and as a consequence, the rise of M2 percent, slowed as the Fed's balance sheet grew in size (law of big numbers), and the United States government did not implement enough fiscal expenditure to keep the Fed's money printer from increasing. The Federal Reserve anticipates that the expansion of its balance sheet will drop to zero shortly. Their balance sheet may decline if they do not reinvest the maturing bonds back into their portfolio.

Correlation analysis on US total debt: Bitcoin Prices

Today marks a watershed point in the history of the United States. For the first time in history, the total national debt has reached over $29 trillion. As the debt pile continues to grow at an alarming rate, it serves as a sobering reminder of how vulnerable the fiat monetary system is. According to the debt clock, this is the case. It's a disturbing view of a design that has gotten out of hand. From January 20th, 2021, until the conclusion of its fiscal year in 2021, the United States added $669 billion to its national debt. That is the amount of extra money borrowed by the federal government to sustain its excessive spending during President Joe Biden's presidency. Much of the higher debt results from new expenditures authorized by President Biden.

This is Why Bitcoin Matters

Should a new recession occur (almost unavoidable), the United States would have considerably more difficulty repaying its debt. And they're not going to provide a helping hand to faltering institutions the way they did in the aftermath of the 2008 financial crisis.

Instead, they'll be forced to resort to the Federal Reserve, which will create even more dollars to tide them over. The result is that inflation rises, causing your money's buying power to fall more. It may result in hyperinflation in the worst situations, as recently seen in Venezuela. Bitcoin is a cryptocurrency that serves as an alternative monetary system. It is the polar opposite of fiat money, such as the dollar. It differs from fiat currency because it has a fixed supply, which means banks cannot issue more at will.

Furthermore, no one body controls or manipulates the country's monetary policy. When the debt bubble eventually bursts, people will rush to find a better way of life. Therefore, the mounting national debt would result in a cryptocurrency bubble.

In a Bloomberg interview, Founder of Oaktree Capital Management Howard Marks raised concern with the Federal Reserve's downside of never withdrawing the support. "For people in the markets believe that the alternative markets, including stocks, bonds, Bitcoin, Ethereum are selling at prices they wouldn't sell at if the FED were not the dominant force at prices that would be determined by just the outlook for the companies and asset. If the FED were to recede, we would all take over as buyers. "

While the crypto market has the competency to optimize the potentially flawed financial system and business production relationships in the form of decentralization infrastructure, when global financial asset liquidity is losing momentum, buyers need to pay greater attention to the risk management of their portfolios.