Crypto and the Anxiety Surrounding Quantitative Tightening

Federal Reserve officials’ gathering, early in May, concluded with the decision that the central bank must tighten in half-point steps over the next couple of meetings. The intention is to charge with an aggressive set of moves, called Quantitative Tightening’, to allow policymakers, the flexibility to shift gears at any point if required.

“Most participants judge that 50 basis-point increases in the target range would likely be appropriate at the next couple of meetings,” read the minutes of the Fed’s May 3-4 meeting that was out on Wednesday in Washington. “Many participants judge that expediting the removal of policy accommodation would leave the committee in a well position later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”

Quantitative Tightening

Quantitative Tightening s basically a way of cutting the money supply to the economy. According to some economists, it helps increase rate hikes in a predictable manner — though, how far this is effective remains to be seen.

Wikipedia defines Quantitative Tightening (QT) thus: A central bank implements quantitative tightening by reducing the financial assets it holds on its balance sheet by selling them into the financial markets, thus forcing the market to sell other assets to pay for these assets.  

The main goal of QT is to raise interest rates so as to avoid increasing inflation. Financial controllers try to achieve this by increasing the cost of accessing money and reducing the demand for goods and services in the economy. 

Common people interpret this move as one in which money printing is stopped. 

Also Read: ‘Buying the Dip’ in Bitcoin: What of Today?

The Reaction from the Crypto Segment

Social media reacts as the US Federal Reserve begins the process of paring back its $9 trillion balance sheet. Following the release of the news about Quantitative Tightening by the Federal Reserve. Experts and analysts have pronounced their conflicting opinions about the same. The experts worry that if Quantitative Tightening implements it will severely impact bitcoin and other cryptocurrencies. 

The Fed intends on downscaling its balance sheet by $47.5 billion per month for the next three months starting today. For September 2022, it would be looking at a $95 billion reduction. The process continues until its balance sheet reduces by $7.6 trillion by the end of the next year.

Analysts from institutional crypto ventures and financial investment firms put forth conflicting opinions as to whether QT. Thereafter, starting on June 1, may effectively end a decade of unprecedented growth across crypto markets. 

A manager at a crypto exchange has remarked that the whole process could have a negative impact on the market. He quotes, “it’s very possible that you might just see growth in market cap trimmed slightly.”

Clearly, the crypto market leaders are anxious about the impact of the QT. Therefore, most anticipating a backfire and loss of assets. 

Also Read: Understanding SegWit and What it Meant for Bitcoin

Wrapping Up

QT rarely applies y central banks. When employed it has only been so after prolonged periods of Greenspan put-type liquidity stimulus. Thereafter, in which case excess liquidity has led to a risk of uncontrolled inflation (e.g. 2008, 2018, and 2022)