The theory of bitcoin mellowing out as it matures — showing less volatility in the past few years than some of the more mercurial stocks in the S&P 500 — was put to the test last week during an especially volatile trading day for crypto and stock markets.
US President Donald Trump reignited the trade fire by announcing 100% tariffs on all Chinese imports. Bitcoin tumbled from its fresh high above $125,000 to about $104,000. US stocks took their worst beating since April, when Trump rolled out his sweeping tariff strategy.
It was a reality check after the price rally that had pushed bitcoin to new heights, with momentum building around the beginning of October after the Federal Reserve cut interest rates for the first time this year. Fed chair Jerome Powell also hinted at more cuts to come.
But Powell mentioned something interesting last week at the National Association for Business Economics conference: the Fed is considering ending its quantitative tightening programme, which got crypto market watchers buzzing.
The opposite of quantitative tightening is quantitative easing. It means the Fed creates new money to buy government bonds and other assets from banks, giving the banks more cash to work with.
With more money available, banks can lend more, businesses can invest and people can spend. It’s a way to lower borrowing costs and inject money, working together with interest rate cuts to jump-start the economy. This is what people mean by the government “printing money”, though no actual printing is involved.
With more money available, banks can lend more, businesses can invest and people can spend
Why the excitement? There’s a compelling chart that tracks bitcoin’s price against M2 money supply, the broad measure of money in the economy, including cash, cheque accounts and easy-access savings. The two track each other remarkably well, with bitcoin’s price lagging M2 movements by a few months.
Several studies have found correlations between M2 supply and both stock markets and bitcoin prices, though this could just be one factor among many driving markets. Technical charts and history are also by no means a crystal ball, and Powell hinting at ending quantitative tightening doesn’t mean quantitative easing is around the corner.
But it’s a reminder that central banks have the power to create money at will, though they don’t always get it right. Case in point: during the pandemic, the Fed increased its balance sheet from $4-trillion to nearly $9-trillion. Many economists blame this for the historic inflation that followed.
Bitcoin’s price surged more than sevenfold from when the Fed started printing in 2020 to its late 2021 peak. We’re nowhere near that kind of scenario now, and other periods of easing have shown much less aggressive price reactions, but you can see why investors are paying close attention.
De Wit is country manager for Luno South Africa
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