Fundamentals and a bit of history
Let's first deal with the fundamentals, what are inflation and quantitative easing?
Inflation is the rise in the overall price level of goods and services in an economy over a period of time. With inflation, money loses its purchasing power, which means that you can buy fewer goods and services with the same money than before. Inflation can occur for a variety of reasons, including increased demand for goods and services, supply constraints, increased costs of production, reduced production, changes in exchange rates, and many other factors. Inflation can have a profound effect on the economy and people's lives, for example, it can lead to higher interest rates on loans, lower purchasing power, lower economic growth, and other negative consequences.
Quantitative easing (QE) by the U.S. Federal Reserve (Fed) is a monetary policy that consists of buying government bonds and other assets in the market in order to increase the money supply in the economy and reduce interest rates. This program was introduced by the Fed in response to the financial crisis of 2008. Since interest rates were already at historic lows, the Fed began buying bonds on the open market to increase the money supply and lower long-term interest rates. This lowered borrowing costs and boosted economic growth. Since then, the Fed has repeatedly used quantitative easing in times of economic crises and lower inflationary expectations. However, while quantitative easing can help stabilize the economy, it can also have negative consequences, such as causing inflation and rising asset prices.
Today's inflation cycle is directly related to the 2020-2021 quantitative easing program. In 2020-2021, the U.S. Federal Reserve again applied quantitative easing in response to the economic consequences of the COVID-19 pandemic. In March 2020, the Fed announced a new $700 billion QE program, which included purchases of government and corporate bonds and mortgage-backed securities. In November 2020, the Fed expanded the QE program by adding another $700 billion to buy government bonds. The goal of the QE program was to lower interest rates to support economic growth and stabilize financial markets during a pandemic. In addition, the Fed cut interest rates to near-zero levels and provided banks with concessional loans. The 2020-2021 QE program helped lower borrowing costs for companies and consumers, increased liquidity levels in the markets, supported economic growth, and of course caused prices to rise and money to decrease purchasing power, in other words, inflation.
In the first half of 2022, the Fed could not turn a blind eye to rising inflation and resorted to the most famous instrument of monetary policy - raising interest rates. Raising interest rates in and of themselves is designed to reduce credit and consumer spending on goods and services, which in turn should lead to lower demand and then lower prices on the supply side. In the supply-side price reduction phase, technology companies and companies whose business model was designed for a low-interest growth market suffer the most. Let us remember Terra/Luna, Celsius, 3AC, FTX, and Voyager. These companies went bankrupt precisely because of the factors of reduced demand for the crypto asset market in general and flaws in product and business models, all of these companies in 2021 and in 2022 were the same, but it is the reduced demand that is destroying them.
Current status
So, back to macroeconomics, up until today all markets existed in the rhetoric that prices were rising, key data to calculate inflation was staying strong and we were a long way from a pause or interest rate cut. Today's data provided the foundation for a growing narrative of a pause in the Fed's meetings and a gradual interest rate cut. Also with that, we should remember that the inflation and target rate data is a lagging indicator and we should not expect sharp changes in monetary policy, just today we got the foundation for the opposite rhetoric and further macroeconomic changes.
What's in store for BTC, medium-term forecast for 3-6 months:
Let's first deal with the fundamentals, what are inflation and quantitative easing?
Inflation is the rise in the overall price level of goods and services in an economy over a period of time. With inflation, money loses its purchasing power, which means that you can buy fewer goods and services with the same money than before. Inflation can occur for a variety of reasons, including increased demand for goods and services, supply constraints, increased costs of production, reduced production, changes in exchange rates, and many other factors. Inflation can have a profound effect on the economy and people's lives, for example, it can lead to higher interest rates on loans, lower purchasing power, lower economic growth, and other negative consequences.
Quantitative easing (QE) by the U.S. Federal Reserve (Fed) is a monetary policy that consists of buying government bonds and other assets in the market in order to increase the money supply in the economy and reduce interest rates. This program was introduced by the Fed in response to the financial crisis of 2008. Since interest rates were already at historic lows, the Fed began buying bonds on the open market to increase the money supply and lower long-term interest rates. This lowered borrowing costs and boosted economic growth. Since then, the Fed has repeatedly used quantitative easing in times of economic crises and lower inflationary expectations. However, while quantitative easing can help stabilize the economy, it can also have negative consequences, such as causing inflation and rising asset prices.
Today's inflation cycle is directly related to the 2020-2021 quantitative easing program. In 2020-2021, the U.S. Federal Reserve again applied quantitative easing in response to the economic consequences of the COVID-19 pandemic. In March 2020, the Fed announced a new $700 billion QE program, which included purchases of government and corporate bonds and mortgage-backed securities. In November 2020, the Fed expanded the QE program by adding another $700 billion to buy government bonds. The goal of the QE program was to lower interest rates to support economic growth and stabilize financial markets during a pandemic. In addition, the Fed cut interest rates to near-zero levels and provided banks with concessional loans. The 2020-2021 QE program helped lower borrowing costs for companies and consumers, increased liquidity levels in the markets, supported economic growth, and of course caused prices to rise and money to decrease purchasing power, in other words, inflation.
In the first half of 2022, the Fed could not turn a blind eye to rising inflation and resorted to the most famous instrument of monetary policy - raising interest rates. Raising interest rates in and of themselves is designed to reduce credit and consumer spending on goods and services, which in turn should lead to lower demand and then lower prices on the supply side. In the supply-side price reduction phase, technology companies and companies whose business model was designed for a low-interest growth market suffer the most. Let us remember Terra/Luna, Celsius, 3AC, FTX, and Voyager. These companies went bankrupt precisely because of the factors of reduced demand for the crypto asset market in general and flaws in product and business models, all of these companies in 2021 and in 2022 were the same, but it is the reduced demand that is destroying them.
Current status
So, back to macroeconomics, up until today all markets existed in the rhetoric that prices were rising, key data to calculate inflation was staying strong and we were a long way from a pause or interest rate cut. Today's data provided the foundation for a growing narrative of a pause in the Fed's meetings and a gradual interest rate cut. Also with that, we should remember that the inflation and target rate data is a lagging indicator and we should not expect sharp changes in monetary policy, just today we got the foundation for the opposite rhetoric and further macroeconomic changes.
What's in store for BTC, medium-term forecast for 3-6 months:
- Moderate rhetoric and positive data on slowing growth in goods and services will push BTC up. The end of the rise in inflation brings a cut in the target rate and new liquidity closer
- The longer the U.S. government negotiates a new budget ceiling, the weaker the dollar will be. A weak dollar is a great time for BTC as an instrument outside the financial system, operating according to its own laws and principles.
- Falling banks and the weakness of the banking system will play to BTC's advantage, BTC in the eyes of the public is a counterweight to the entire banking system.
