Bitcoin: Regulation Around Central Banks Positive for BTC Price
The Bitcoin price is rising as central banks and governments do everything to stabilize the current economy.
The Bitcoin price is rising as central banks and governments do everything they can to stabilize the current economy. What can we expect in the coming period and how will Bitcoin respond?
The world’s major central banks reached an agreement on Sunday afternoon on a stabilization package designed to ensure the financial system doesn’t run out of liquidity. The U.S. Federal Reserve provides central banks in Canada, the United Kingdom, Japan, Switzerland, and the euro area with daily US dollar liquidity. Previously, this supply of US dollars was on a weekly basis. Through this setup, central banks can exchange their domestic currencies for US dollars. This ensures that financial institutions can quickly obtain new liquidity to meet their financial obligations.
Banking Crisis: this is just the beginning
In the current scenario, banks want to prevent stakeholders from worrying about liquidity shortfalls. The uncertainty in the banking world is so high that people fear domino effects, especially since the problems around Credit Suisse aren’t over yet.
The fact that Credit Suisse bondholders (despite UBS’s takeover) aren’t compensated has crushed confidence in bank bonds worldwide. The response to this decision was immediately visible at the open of Asian markets yesterday. Shares of many bank bonds dropped sharply yesterday. A bond is a loan issued by a company or government, in this case to banks.
Dumping bank stocks and bank bonds will likely continue this week. In other words: market participants are losing faith in banks. Further bank runs are not unlikely in the coming days.
Fed, ECB and Co. Dampen Financial Crisis
Whether it’s the newly launched Bank Term Funding Program or the joint action on Sunday afternoon, everything’s being done to prevent a financial catastrophe. Central banks are signaling what former ECB chief Mario Draghi said in 2012 about the euro crisis: "Whatever it takes." Countries with the biggest problems will, together with their central banks, provide as much liquidity (i.e., loans) as needed.
On the one hand, this should calm the markets, but on the other hand, it shows how serious the situation is. The fact that the U.S. Federal Reserve loudly tells the market, "No need to panic" isn’t exactly a positive indicator.
Money Supply Is Growing Again...
The effect of the rescue efforts is already visible in the balance sheet of the U.S. Federal Reserve. While this balance has shrunk during the tighter monetary policy of recent months, i.e., liquidity was withdrawn from the market, we can now see the opposite.
Even if the base rate remains high, the money supply in the system is being expanded by other means. The current rescue actions have already led to an expansion of liquidity. After all, loans or refinancing options are being offered that would have been unthinkable when Silicon Valley Bank failed.
...and So Bitcoin Too
Bitcoin’s reaction to the current monetary policy is easy to see in its price. With every new rescue action by central banks, the Bitcoin price keeps rising. The combination of inflation and loose monetary policy is ideal for Bitcoin, meant as a ‘store of value.’ The result? Bitcoin price rose above €26,619 at the start of this week and is up more than 12% in a week.
Bitcoin with a Confidence Dividend
Even though Bitcoin’s rise, like that of tech stocks, is mainly driven by expectations of loose monetary policy, the confidence factor can’t be ignored. Central banks are in a perpetual rescue mode and are trying to offset the effects of rate hikes with measures and mechanisms. The result? A less free market.
Most countries can’t afford this high rate for the long term. So, even apart from the current banking crisis, the current policy isn’t sustainable for a long time. This becomes especially clear when current negative real rates are unwound. That will lead to deleveraging (debt reduction) for many countries, since inflation is higher than the policy rate. If inflation soon falls below the policy rate, it will become harder to finance government debt long term. With the current inflation and policy rate trajectory, that could already be the case in summer and autumn.
More and more players are flirting with (digital) currencies like Bitcoin, which offer a hedge against the coming pressure. Banks can fail and money in accounts can disappear or be devalued. Bitcoin, on the other hand, can’t vanish into thin air. We’ll continue to closely monitor the future situation and developments.
