Mark your calendars: In three business days, on June 1, 2022, the Federal Reserve will start the process of quantitative tightening, lowering the size of its mind-boggling $9 trillion balance sheet.
The process will have impacts on everything from stocks to Treasuries to, you guessed it, cryptocurrency, and digital assets.
It might sound a little strange that a decentralized asset, independent of Fed control, will respond to a central bank policy, but there will be repercussions – and not all of them negative.
Quantitative Easing Gives Way to Tightening
Quantitative Easing, or, as the pros call it “QE,” is a monetary policy designed to boost the economy, to get consumers spending and business growing. A central bank takes the (once unusual) step of going into the market and buying quantities of government bonds. These days, they’ll often buy other assets, too, like mortgage-backed securities, stocks, and even exchange-traded funds (ETFs). In the last decade, the Bank of Japan was notorious for “owning” massive blocks of shares of most of the firms listed on the country’s Nikkei Index, regardless of whether or not they were good stocks.
Now, it’s worth mentioning that easing is often controversial among pundits, who see it as an “easy bailout,” or a way for the central bank to prop up companies and spur lucrative share buyback cycles – we’ll leave that debate for another day.
Easing had been “tapering off” in the latter half of the decade after the Crash of 2008, but it returned with a vengeance, all over the developed world, in the wake of the March 2020 “COVID Crash”; easing is perhaps the most powerful tool a central bank has for stimulating economic activity and pumping trillions into the financial system.
This is a big, big reason why markets went ballistic immediately after the 2020 crash and didn’t really stop until early this year.
But, as you probably guessed, easing can’t go on forever, despite all the jokes Wall Street insiders made about “QE Infinity” back in 2013 and 2014.
And the Fed is set to begin quantitative tightening, raising interest rates, and selling many of the assets it bought back into the market in just a few days.
Now, tightening is unnerving to traders at the best of times because it can generate extreme selling pressure, and it always signifies money moving out of the system. But, of course this time, the Fed happens to be tightening in environment of white-hot inflation, rising interest rates, a very iffy stock market (most of which is already in textbook “bear market territory”), geopolitical uncertainty and war, a persistent pandemic which could flare up at any second, and global supply chains that are stretched beyond the breaking point in many places.
Equities markets will have to “do the work,” and recalibrate. A generation of investors accustomed to throwing darts at a list of investments and winning big will have to roll up their sleeves and get used to a “stock pickers market.”
But, we’re crypto investors. What does all this mean for us?
It’s “Accumulation Season”
Well, it means we’re in a “crypto pickers’ market.” Lousy projects that have little or no value will crater faster and harder than they did during the most recent crypto bull market. That’s a good thing.
We’re going to have to “recalibrate” our emotions, too, and cut losses sooner than we might have before. We’ll speculate less and invest more.
Most importantly, tightening means we may not be at the bottom yet. Big crypto and the NASDAQ Composite are both fairly highly correlated right now, which some folks, like Cathie Wood, see as a sign of an impending bottom, but we’re not necessarily convinced it’s here.
Above all, this time of Fed Quantitative Tightening means the smart play is to build positions in quality coins and projects. Dollar-cost averaging is smart all the time, but it’s critical at a time like this; there’s no cheaper way to accumulate crypto. Consider setting automatic purchases of the coins you like and the ones we talk about. Let it ride.
So, when the bull does come back – and it will come back, make no mistake – you’ll be miles ahead of the crowd that fled to the sidelines.
Editor, American Institute for Crypto Investors
May 27 2022