Original Author: Mabrary

This article will start from the impact of the two monetary policies of interest rate hike and quantitative easing on the price of Bitcoin, combined with the attitude of current monetary policy decision makers towards interest rate hikes, hoping to bring help and inspiration to everyone in the interpretation of monetary policy .

1. Taking history as a mirror: interest rate hike = bearish?

Bitcoin is the originator of Crypto, and it is also a barometer of the market. We compare the internal indicators of Crypto such as the market value of Bitcoin and the halving cycle with external indicators such as the Federal Reserve interest rate and the QE cycle, and find out from historical data that Bitcoin Changes between currency prices and these four sets of data.

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Image source: OKLink

Note: The green dotted line represents quantitative easing (QE), and the red represents balance sheet reduction (QT). The horizontal dotted line represents the monthly bond purchase/shrinkage scale, and the shaded area represents the total bond purchase/shrinkage scale during the period.

BTC halving time: 2012.11.28｜2016.7.9｜2020.5.12｜2024.5 (estimated)

With the three halvings of Bitcoin, the price of Bitcoin has increased by 580 times, 128 times and 18 times in the three bull-bear cycles.

At the end of 2012, Bitcoin completed the first block reward halving. After a slight correction in April 2013, it reached a stage high of $1160 in November of that year, which lasted 12 months. Accompanied by low interest rates and the Fed's third QE (quantitative easing, 2012.9~2014.10), the price of BTC has achieved a 580-fold increase from the low point of the $2 stage. At this time, the market value of Bitcoin is small ($13.9b), and Transactions mostly take place in China, so the Federal Reserve's monetary policy doesn't actually have much impact on bitcoin prices.

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Data from: Federal Reserve official website

It will be halved for the third time in May 2020, and after the bottom confirmation of $3850 was completed in March of the same year, an upward channel was opened. At the same time, in response to the impact of the new crown virus, the Federal Reserve launched the fifth round of super QE in March. Two months later, the Fed's interest rate fell to a low of nearly ten years. Due to the restrictions of domestic policies and the gradual favor of BTC by American capital, a major feature of this round of bull market is "U.S. stocks", that is, BTC prices and U.S. stocks (especially technology stocks) show a strong correlation. Sufficient liquidity brought about by favorable monetary policies, coupled with the increasing recognition of Crypto by traditional markets, this round of bull market reached the current price high of $69,000 in November (that is, 19 months after halving). At the bottom of a bear market, there has been an increase of nearly 18 times, and the market value has increased by 2.94 times from the previous high.

The relationship between Bitcoin and the United States has also attracted the attention of the Fed's monetary policy from the crypto circle.

2. Who decides the hawks and doves?

The so-called "doves" and "hawks" originally originated from the media's description of political and diplomatic attitudes, especially war tendencies. The hawks are fighting, and they prefer to use tough methods to solve the problem, and cut the mess quickly; while the doves are fighting, sometimes they are boiling frogs in warm water. When these two words are used in monetary policy, it shows that hawks are more sensitive to inflation and hope to control inflation and stabilize prices by tightening monetary policy (such as raising interest rates and shrinking balance sheets). Doves will pay more attention to stimulating employment, maintaining economic growth, and entering the interest rate hike cycle later.

Monetary Policy

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Federal Reserve & U.S. Government Cooperation Framework

Due to the voting system, the decision on whether to raise or lower interest rates is not decided by the chairman of the Federal Reserve alone, but the result of a joint vote by a committee of 12 members of the Federal Reserve. Next, we briefly understand the composition of the Federal Reserve. The Fed has three key entities - the Board of Governors, the Reserve Banks and the Federal Open Market Committee (FOMC).

competent authority

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Member of the Federal Reserve Board of Governors

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decision-making body

The main monetary policy tool of the Federal Reserve is open market operations (Open Market Operations), that is, buying and selling treasury bonds and MBS. The Federal Open Market Committee (FOMC) is the decision-making body of US monetary policy. At the FOMC meeting, 12 members vote to decide which monetary policy tool to use and how to use it. All 7 members of the above-mentioned Board of Governors serve on the FOMC, plus New York Fed President John C. Williams, these 8 people are permanent members of the FOMC. The remaining four members are rotated among the 11 regional Federal Reserve Bank presidents. Beginning in January 2021, the presidents of the Boston, Cleveland, Kansas, and St. Louis Feds will serve as presidents.

Based on the speeches of the regional Fed presidents in public, we have summarized their preference for monetary policy. As can be seen, the hawks dominate.

It should be noted that since the interest rate increase is a foregone conclusion, how much and when to increase should be the focus of the market's attention.

3. Anticipation point of view

In the first two halving markets, although the two major monetary policies of interest rate hike and quantitative easing did not play a decisive role on the whole, the halving cycle and monetary policy alternately affected prices. However, with the mainstreaming of BTC, the performance of this risky asset is gradually related to the attitude of the Federal Reserve, which will affect market expectations in the short term. In the recent bitcoin market, we can see a short-term rule, that is, when the Fed's hawkish remarks meet expectations, the BTC price will rebound slightly; once it exceeds expectations, the price will fluctuate.

In addition to this kind of short-term sentiment, it is also worth paying attention to when the balance sheet will start to shrink during this round of interest rate hike cycle. Looking back at the entire process from the release of the Fed’s balance sheet shrinking signal in April to October’s start of shrinking the balance sheet in 2017, due to the full expected inclusion, the impact of shrinking the balance sheet on asset prices is relatively limited, but more driven by growth factors. After shrinking the balance sheet in October 2017, U.S. bond interest rates rose in the first three quarters of 2018, and U.S. stocks also rose. The reason why the market can continue to rise is that in addition to sufficient expectations, the fundamentals of earnings at that time also continued to rise driven by the Trump tax reform passed at the end of 2017, resisting the pressure of monetary tightening and interest rate hikes.

In contrast to the current cycle of interest rate hikes, since the federal funds target rate is still the main monetary policy tool of the Federal Reserve, the market generally focuses on the pace of interest rate hikes, which may cause insufficient digestion of expectations for balance sheet reduction. The minutes of the Federal Reserve's January FOMC meeting showed that the participating Fed policymakers are expected to start raising interest rates soon, and did not mention the possible timing and scale of shrinking the balance sheet. However, most participants believed that if inflation did not come down as expected, it might be appropriate to tighten the currency sooner, possibly in May. Compared with the digestion time of 2017 and 6 months and favorable policies, if this round of balance sheet shrinkage starts in May as expected by the market, it may have a certain impact on the market.

Although the "hawk side" of the Federal Reserve Committee is bigger, the author guesses that the Fed will not raise interest rates suddenly after the end of Tapper in March in order to retain more policy flexibility. Moderately raise interest rates and wait for the response of inflation and employment. If you advance, you can increase the pace of interest rate hikes or even shrink the balance sheet. If you retreat, you can maintain a small pace of interest rate hikes. A better monetary policy plan should be balanced between economic growth, stability and inflation suppression. However, once there are hawkish remarks or actions that exceed expectations, holding risky assets such as Crypto requires risk prevention and hedging.