Measures of the US Federal Reserve and other central banks have prompted an increase in virtual currency values.
After a short time just when it seemed as cryptocurrencies and all financial solutions with any level of risk were being shelved in favor of low-risk items like holding government or cash bonds (specifically the US dollar & Treasuries), the activities of the Federal Reserve along with other central banks have prompted a roar back in equity markets. As well as, a corresponding boost in cryptocurrency values, according to Forbes journalist Roger Huang.
On March 15th, 2020, the Federal Reserve slices fees to zero within an unscheduled speed cut. The S&P 500 had its most significant quarter since 1998, and bitcoin’s price, about to touch $ 5,000 that period, is currently roaring back above the $ 10,000 mark.
Understanding the connection between monetary policy and cryptocurrencies is challenging, though it is a worthy exercise. As cryptocurrencies begin shooting on institutional speculation, their short term price movements gyrate together with the markets. This is plainly stated and usually observed: some institutional investors consider bitcoin electronic gold.
They will use bitcoin as a hedge against the inflation they believe will be the outcome of excessive unconventional financial policy. This was the clear perspective of Paul Tudor Jones, the billionaire investor loading up on bitcoin.
In this particular reading, central banks’ measures generated the need for cryptocurrencies by building the conditions (excessive cash supply) wherein a specific category of institutional investors feels the need to hedge wealth.
But structural changes in financial policy implementation presented surprising support and developments for new cryptocurrencies with techniques that go beyond the “cryptocurrency as hedge” narrative.
Alternative fiscal solutions
Considering the latest phenomena of DeFi, decentralized financial businesses are mostly based on the Ethereum network, and use locked Ether to support its financial services. DeFi represents alternative fiscal solutions trying to augment or even replace conventional loans.
Usually, there is a “search for yield” that occurs when few choices to deliver funds in deposits or low-risk products. DeFi, with interest rates that range up to 100 % annually yields on stablecoins, is an appealing alternative to traditional banks, which could provide an insignificant 1 % yearly yield at very best.
Within this framework, specific nuances are apparent and possibly warnings as well. Products that yield higher likely are natural arbitrage situations that may fade away anytime. It also presents opportunities (such as exploits), which may be under accounted for. Nevertheless, even if there are plenty of question marks, there is no question that coordinated financial policy around the globe is driving individuals to search for new technologies and companies like DeFi.
The quantity of unprecedented financial support has also developed a short term window for institutional investors to have the ability to get into cryptocurrencies. Grayscale Investments LLC attracted much more than $ 900 million in the 2nd quarter of 2020, doubling the amount it has ever raised in the past. Nearly all participants were institutional investors, who had been dependent on monetary policy and positioned in a “search for hedge-seeking solution and yield.”
Several of which were due to arbitrage. However, there is no question that institutional investors were the ones that have been battening down the hatches. When COVID-19 worldwide lockdowns were put in place, it stimulated various financial investments, including cryptocurrencies.
Several of this institutional investment is on the heels of top figures in the market, searching for shelter during the most considerable financial expansion ever. It helped accentuate this short term pattern, with institutional investors suddenly discovering the context, the support, and the need to start heavily investing in cryptocurrencies.
Beyond these variables, nonetheless, is the possible pending development associated with a digital dollar. It isn’t being pushed by monetary authorities but seriously discussed in Congress’s halls of power. Nevertheless, exploration in this topic will spur interest in cryptocurrencies by verifying the virtual ascendency of finance into a legitimate payment system — and producing another item and a contrast that may discuss cryptocurrency’s usefulness as a hedge.
Nonetheless, it’s the more significant retail adoption of bitcoin and cryptocurrencies that’s much more fascinating. If compared to the short term motions related to institutional investors pushed by financial policy towards cryptocurrencies.
A new analysis from Cornerstone Advisors states that 15% of Americans today own some cryptocurrency, with about one half of those having purchased in the first six weeks of 2020, among unprecedented financial policy changes and COVID 19. High-income individuals, millennials & Gen Xers are the primary demographic spurring this particular growth. 55% of Americans that do not hold cryptocurrencies and also have no plans to so believe that their financial health will remain the same. On the contrary, 44% percent of Americans who invested in cryptocurrencies thought that their financial health was significantly better.
Cryptocurrencies are receiving short-term boosts in pricing originating from a wave of retail and institutional investors with an assortment of bonuses, which is caused by the most significant financial expansion in recent history. Several of the rewards are here for the very long haul, as financial authorities wrestle with the short-term consequences of the COVID-19 pandemic and the possible economic recovery attempts. Monetary policy during COVID-19 is acting as a bridge to cryptocurrencies for several new institutional and retail investors that were skeptical in the past. The lack of trust in the traditional financial systems and governments may be an enduring reason to remain active in the cryptocurrency markets. One thing is sure the world of finance as we know it is a thing of the past. Autonomy and decentralization will play an essential role in the world’s economy post-COVID-19.
Get in touch with me on LinkedIn and follow me on Medium.
About Author
