In April 2021, the cryptocurrency market surpassed $ 2 trillion for the first time. The cryptocurrency price has risen steadily since September 2020 and peaked less than a month after the Senate passed Biden’s $ 1.9 trillion incentive bill.
Are these two events related? Most likely, yes, and in more than one way.
Inflation risk required for a store of value
Financial events are not islands; every major shift in the financial market is likely to resonate around the world. Thus, it is natural to assume that the Fed’s decision to pump trillions into the system to support citizens’ stimulus demands affects global financial markets in many ways.
Could the tide be powerful enough to cause a sharp jump in the market capitalization of cryptocurrencies? There is no consensus on this, just as there seems to be no consensus on the consequences of printing hundreds of billions of dollars out of thin air.
Some analysts are predicting hyperinflation. Others see the trillions as a lifeline in print that could save the global economy from collapse without significant long-term repercussions.
While there may be too many apocalyptic predictions, it’s safe to say that it will be difficult for the Federal Reserve to keep inflation around its current 2% target. Too many unknowns threaten to destabilize an already weak economy after more than 13 months of the pandemic.
When inflation or the threat of inflation strikes, the natural course of action is to invest your money in assets that are most likely to outperform the market. Typically these are gold, commodities, real estate and Treasury inflation-protected securities (TIPS). In 2020, BTC managed to win the trust of investors and convince them of its ability to outperform the market.
Correlation of bitcoin with gold hits record high in 2020
The market capitalization of BTC started to rise after September 2020. After relatively weak performance – as in all other financial markets – the growing demand for bitcoin has raised its price.
Several events could provoke the market’s appetite for Bitcoin in particular and cryptocurrency in general. Here is some of them:
- Forecasts of bitcoin price rise to $ 300,000 over five years, with or without Wall Street support, have given wings to small investors.
- In September 2020, the United States was already battling a second wave of the pandemic; More and more people began to realize that by the end of the year the economy would be hit even more.
- Around the same time, Bitcoin reached an impressive milestone: its correlation with gold reached an all-time high, making it clear to many doubters that BTC is not a get-rich-quick scheme, but a “heavenly asset” like gold.
All this happened in a special political climate. As the presidential election approached, the US population was divided and uncertainty reached alarming levels. When rumors of a new incentive bill arose, people reverted to cryptocurrencies in order to preserve value.
Printing more money increases government debt
By choosing to print trillions, politicians are changing the value of our money. In an attempt to “bolster the economy,” they manipulate inflation, affect currency performance, and increase government debt. With every billion the Fed invests in the economy, the burden of taxpayers is getting worse and worse.
In the United States, public debt has grown alarmingly since the early 2000s. In 2009, when Satoshi Nakamoto created Bitcoin, we can finally store value regardless of political decisions. A peer-to-peer payment system that does not rely on centralized intermediaries is less likely to be affected by manipulation by governments and central banks.
The more government debt grows, the more money people can invest in cryptocurrencies to protect themselves from the fact that their wealth is losing value every hour. Although there is no official correlation between the development of cryptocurrency prices and government debt, the charts speak for themselves: the more government debt grows, the more the price of BTC is expected to rise.
Governments can print money, but we cannot print savings
The secrecy of “big money” makes it difficult to protect your wealth during a crisis. The huge gap between understanding how finance and investment work and knowing what is happening behind the closed doors of banks and governments leads to mistrust.
We rely on analysts to read data to us and guide our decisions because we are skeptical of central authorities. People are looking for alternatives due to a lack of transparency about where these trillions are coming from and what helps central banks print money day and night to cover deficits.
It’s not just a handful of early adopters who are more keen to protect their savings from possible inflation. Small and medium-sized investors have turned to BTC and other cryptocurrencies because they not only need assets with a limited supply to counter inflation, but also decentralized alternatives.
Investing in Bitcoin and cryptocurrencies in general just makes sense, even for those who have no idea what blockchain technology is or how it works. We may not understand the code, but we know that the owners of bitcoins made a profit during the pandemic. The value of BTC fell along with the stock market in March 2020, but its dynamics during the year exceeded all expectations. What’s more, BTC performed 10x better than gold in 2020 and outperformed most S&P 500 companies, including giants like Microsoft, Netflix, Amazon, or Alphabet.
Institutional Support Confirms Bitcoin’s Position
Influenced by the threat of inflation, Wall Street has also shown its support for cryptocurrencies. When billionaires started buying BTC to save value, skeptics and doubters took notice. S&P 500 companies have been buying Bitcoin since January 2021, causing the price of BTC to skyrocket several times and hit new levels every month.
Figures and opinions pointed investors in the same direction. It was enough for Elon Musk to add “Bitcoin” to his Twitter to increase the demand for BTC – and with the increase in demand, the price rose again. Tesla, MicroStrategy, and Square hold nearly $ 3.9 billion worth of cryptocurrencies. This number gave investors more reasons to buy BTC and other cryptocurrencies.
What’s the connection with the Federal Reserve, which prints more money? Elon Musk explained this on Twitter in February: “When fiat currency has a negative real interest, only a fool wouldn’t look elsewhere.“
“When a fiat currency has a negative real interest rate, only a fool would not look elsewhere. “
A negative real interest rate occurs when the inflation rate is higher than the nominal interest rate. S&P 500 companies fear inflation due to increasing money supply, so they invest in assets, and right now Bitcoin is on the list of limited supply assets that can outperform the market.
There is a correlation between the rise in the market capitalization of a cryptocurrency and how much money is printed. One event by itself cannot create the effects that we have seen in the cryptocurrency market, but it did help. This enabled cryptocurrencies to attract the attention of investment banks and S&P 500 companies and increased confidence in digital assets.