- The Bitcoin price is showing signs of recovery as the Fed has issued new debt to mitigate the coronavirus crisis (COVID-19).
- The traditional market also reacted positively to the announcement of a stimulus package of around $2 trillion.
Bitcoin and the crypto market have started to show signs of recovery. After weeks of uncertainty due to the emergence of COVID-19, the global economy had recorded losses not seen since the 2008 economic crisis. To mitigate the crisis, the US Federal Reserve (Fed) and the European Central Bank announced measures to revive the economy.
The US Congress negotiated a package for days. One of the bills, which is aimed at providing direct support to US citizens, foresees the issuance of a “digital dollar”. The Federal Reserve (FED) would finance this aid and other measures (purchase of bonds, mortgage-backed securities, etc.) with a policy called “the infinite money machine” in crypto space. The name comes from the statement of the FED President that the central bank has an “infinite” amount of USD to spend.
Yesterday, Senate Democratic Party minority leader Chuck Schumer and Finance Minister Steven Mnukhin said they were close to an agreement on the stimulus package. Details of the package are still pending, but it is estimated that it will inject between $1.6 trillion and $2 trillion into the economy. Following the announcement, the Dow Jones index recorded one of the largest gains in decades, with 11.37% of profits. Todd Rosenbluth, director of the Mutual Exchange, spoke about the measures the Fed will take and said:
Wow. The Fed will be buying investment grade corp bond ETFs like presumably LQD, VCIT, SPIB. These funds have diversification and liquidity but demand for underlying bonds has weakened. This is a whole new world.
Bitcoin reacts to the “infinite money” machine
The crypto market was positively influenced by the rise of the Dow Jones. Although there has been some discussion of a decoupling between Bitcoin and the stock exchanges, the first cryptocurrency by market capitalization was gaining about 3.34% at the time of the writing. The rest of the market followed BTC and Ethereum (+3.37%), Litecoin (+3.9%), XRP (2.5%) and other cryptocurrencies also recorded gains.
However, there is no consensus in the community as to what the implications for the crypto market will be due to the FED’s announcement. Some analysts such as Alex Krüger think that the Fed’s policy will have negative consequences for Bitcoin. This is because, as Krüger stated, Bitcoin does not react to macro variables:
It is such an illiquid/fragmented market that in the absence of mass influx of new buyers, actions of a few determine direction. Micro, not macro.
The analyst said that the only bullish narrative for Bitcoin is Halving and Stock to Flow model. Morgan Creek Digital co-founder Anthony Pompliano responded to Krüger and said that the analyst rushed his conclusions. Pompliano said:
QE doesn’t have immediate impact. Normally 12-18 months later.
Most have said the Rocket Fuel is combination of QE, interest rate cuts & halving.
Declaring a narrative dead after ~90 days when it takes 12-18 months is short sided.
It remains to be seen what the market reaction will be in the coming days. Market volatility could continue to increase if the COVID-19 emergency continues. For now, the Bitcoin’s price has fallen moderately by 2.96% with the last 24 hours, to $6.559, at the time of publication.