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December 9, 2022
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The dangerous relationship between Bitcoin and the Federal Reserve

Institutional finance divided into the usefulness of cryptocurrencies.

The dangerous relationship between Bitcoin and the Federal Reserve. Among the world’s leading central banks, one of the most critical and skeptical of digital currencies and Bitcoin is certainly the US Federal Reserve (FED), which is the only one among the world’s largest banks that still doesn’t believe it’s worth it. effort to even start a study on the possibilities of adopting a Central Bank Digital Currency (CBDC).

In July, the bank said that the existence of CBDCs would likely make Bitcoin and other cryptocurrencies absolutely useless. And it is no coincidence that a few days ago the president of the Bank for International Settlements, Benoit Coeure, reiterated the need for state digital coins.

President Jerome Powell effectively reiterated that he considered cryptocurrencies a highly speculative and unreliable asset and therefore totally inadequate to replace traditional currencies.

In August, Powell also stated that he thought cryptocurrencies should be better regulated. At this point, the SEC certainly seems to have gotten the message, as in recent months the US stock exchange authority has opened dozens of investigations into US cryptocurrency companies for alleged violations of financial rules.

The Federal Reserve is also very concerned about the spread of stablecoins, which, unlike normal cryptocurrencies, are pegged to a fiat currency like the dollar.

And that, according to many observers, scares central banks like the Fed, because they could actually be an alternative to fiat currencies, being much less speculative than normal cryptocurrencies.

Cryptocurrencies are beyond the control of central banks.

Another aspect that scares the Fed to some extent is that Bitcoin was born after the great financial crisis of 2008, to provide the world with a payment system that escaped all the manipulation generated by the central authorities, which according to the Bitcoin inventors was a of the real causes of the great subprime mortgage crisis.

The role of the large central banks is precisely to control inflation and contain its rise, with an adequate interest rate policy, or through expansive policies to buy bonds to finance the economic system, as happened in 2008 and as is happening now after the great economic period. crisis caused by the pandemic.

Now, according to many observers, it is precisely the Fed that can tighten this expansionary policy to contain the first signs of rising inflation.

It is no coincidence that Bitcoin is seen as a weapon to fight inflation and therefore is widely used in underdeveloped states, which have a hyperinflation problem.

How FED moves affect Bitcoin.

According to some economists, the spread of cryptocurrencies could reduce the effects of the monetary policy of the Fed and other central banks, as it would reduce the demand for fiat currencies.

Bitcoin and cryptocurrencies, as mentioned above, would reduce the risk of inflation, which central banks must control by lowering or raising interest rates as needed.

It is now a pretty clear fact that dollar and Bitcoin prices are indirectly correlated, and often a rise in one corresponds to a fall in the other.

Likewise, therefore, an increase in US rates by the Fed often corresponds to a fall in Bitcoin prices, due to the migration of investments to dollar assets and a consequent lower exposure to other more speculative assets such as Bitcoin and cryptocurrencies in in general.

For stock indices, the correlation seems less direct, but in the last period a synergistic trend seems to prevail especially between Bitcoin and Dow Jones, the main US stock index. When one goes up, the other often goes up and vice versa.

Source: cryptonomist

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