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Can Bitcoin Preserve Wealth in an Era of Money Printing?

In an era of easy money and cheap credit, America's central bank may soon be out of options to stimulate the economy. But when the ticker drops, can Bitcoin really catch fleeing investors?

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Key Takeaways

  • The Fed flooded markets with cheap credit over the last decade, despite the resilient economic activity during this period.
  • A reliance on easy money has made markets more susceptible to headwinds.
  • Prolonging the business cycle, as the Fed has, is a recipe for disaster in the long-term.
  • Bitcoin provides a hedge against inflation and authority – both of which are prominent concerns for the future.

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Bitcoin could be bolstered by the Federal Reserve’s rate cuts and years of money printing. After flooding markets with money over the last decade, the Fed may not be able to offer much support to a market that is now accustomed to low rates and cheap credit. 

The Post-2008 Economy

To influence the economy, authorities have two tools: fiscal and monetary. 

Cutting interest rates, expanding or contracting the money supply, and providing liquidity to banks make up monetary policy. Tax and direct spending activities encompass fiscal policy.

When the 2008 global financial crisis occurred, the Fed sprung into action to launch the first round of money expansion via quantitative easing (QE). This move signaled to financial institutions that the central bank would support the economy as the buyer of last resort.

To further incentivize banks to avail credit facilities during the crisis, the Federal Reserve reduced interest rates from over 5% to 0% from 2007 to 2008. Reducing rates by such a large proportion was a real incentive for financial institutions.

This rate stayed at 0% until December 2015. After nine years of only cutting, the Fed finally increased interest rates. But they were only able to raise it as far as 2.5% by December 2018 before stress started to show up in the short-term funding market during December 2019, forcing them to start cutting rates again.

Now, in March 2020, rates have returned to 0% and QE round four has begun. The Fed would provide $4 trillion through various measures such as quantitative easing and open market operations. 

Global financial markets have begun to rely on the influx of liquidity the Fed provides. From stocks to property, the effect of money printing and cheap credit can be seen everywhere.

Every time the economy hits a speed bump, financial institutions know they can rely on the Fed to lower rates and commit to buying their bonds. This worked in 2008 because rates were high and then cut to zero, and the Fed wasn’t already pushing trillions into the economy through quantitative easing. 

The financial industry is so dependent on money printing that funding markets started to get stressed when interest rates crossed the 2% threshold.

Now, as the world inches closer to a global recession, will this same strategy be successful?

Federal funds rate. Source: MacroTrends

The Case for Bitcoin

Monetary action has lost its power thanks to a decade of rash use, and with it, so has the Fed. 

After announcing a new round of QE and a rate cut to zero, markets continued to slink downwards – an unusual reaction. This is a rare signal from market participants that the continuation of the same monetary policy isn’t going to work this time.

It was only when the government announced a $2 trillion spending package that the stock market started to rebound.

Now, the United States has deployed both its tools and cannot do much else. That’s where Bitcoin comes in.

The global economy is in this situation because the bull market was artificially prolonged with cheap credit. In a Bitcoin economy, no entity can control the money printer.

Economic sentiment is a result of pure demand and supply.

As per the Austrian business cycle, economies will have their ups and downs. Fighting this naturally occurring cycle and prolonging the upswing will lead to disaster when it finally comes crashing down. This appears to be what’s happening in the economy today. 

Bitcoin’s economic framework can only be changed with a mass community consensus, and this is unlikely to ever happen. With the economy descending into chaos, and the Fed unable to further intervene, it creates the perfect storm for an asset like Bitcoin that doesn’t depend on authorities to run and flourish.

Stocks ended 2018 on a slightly weak note, with a 6.6% yearly loss. Bitcoin, however, saw a massive loss of 73% from yearly open to close. One could make the argument that Bitcoin has served its time in a sustained bear trend and should be primed to take off, while stocks are in for more pain. 

But when the economy is weak and everyone is flooding to cash, it is unlikely that retail or institutional investors will allocate to Bitcoin. Retail needs their cash for survival; institutions would prefer to deploy in relatively safer investment vehicles. 

Bitcoin correlation with the S&P 500, a bellwether for the American economy, has reached an all-time high. Source: CoinMetrics

Bitcoin has had a positive correlation with the S&P 500 over the last month. Two weeks ago, this correlation hit a record high of 0.6, meaning Bitcoin moved in tandem with the stock market 60% of the time. 

There’s no debate that stocks are risky assets, but this goes to show that investors are categorizing Bitcoin as the same.

This doesn’t mean all is lost for Bitcoin, however. In crises like this, where governments are given more power than before, they usually don’t revert to the old-normal and give up their newfound authority.

Bitcoin, the uncensorable payments protocol, could find new life in this situation as more citizens realize the value of not being at the whim of governments. 

As it stands, Bitcoin may be in for another lengthy period of suppressed price. But it is still a hedge against high-inflation and authority. This is invaluable, as no other asset in existence can provide both of these benefits, and they could both be advantages for the not-so-distant future. 

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