In November of last year, the United States’ central bank, the Federal Reserve, announced it was going to sell the assets on its balance sheet. That is precisely the moment when bitcoin (BTC) and other cryptocurrencies found their peak. Cubic Analytics’ Caleb Franzen explains why and what we can expect.
Central bank cause bitcoin decline?
In a interview with Anthony Pompliano Franzen explains that assets and interest rates are inversely correlated. This applies to almost all assets, including crypto such as bitcoin. With interest rates rising, almost all other assets are falling like a block. This even applies to bonds, which are actually a so-called ‘cash equivalent’. Interest rates are rising because central banks want to bring inflation down.
“As long as we have rising interest rates, I don’t expect a bull market,” explains Franzen. Pompliano, AKA “Pomp,” asked him what needs to be done to stop the Federal Reserve from raising interest rates. “If we see inflation fall and if this decline continues, that could be a sign of a monetary policy reversal.” the analyst answers. It is not a hard cause, but there is a clear correlation.
Franzen also examined how Federal Reserve policies have impacted stocks and cryptocurrencies in the past. Bitcoin and the stock markets bottomed out in 2018, when the Federal Reserve officially stopped raising interest rates. In 2020, markets bottomed out after a spine-chilling drop as the Fed announced “unlimited support for the financial system.” At the end of 2021, crypto and equities reached their peak again, and then the first rate hikes were announced.
Iinflation remains, not good news for crypto
Franzen further emphasizes that the ratio between bank loans and the total amount of money (also called ‘M2’) is important. This shows that more loans are being issued than there is money. That can be a source of inflation. So even though the prices of almost all assets are falling, inflation may persist. Not good news, but the central bank can in theory influence the demand for these loans by raising interest rates.
