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HOW THE RISE IN RATE AND THE WITHDRAWAL OF STIMULUS FROM THE FEDERAL RESERVE AFFECTS BITCOIN







This graph shows the historical evolution of the US Federal Reserve (FED) rates over the last 20 years. As can be seen, bitcoin has been greatly favored by a time of historically low interest rates, which favor the creation and development of new projects and initiatives.




In 2017-2018, as can be seen in the graph, there was a drastic increase in interest rates by the FED. Although the quota achieved was low -2.5%-, it had important effects on bitcoin and the stock markets. We are going to study them briefly in this article, to establish parallels with the current situation, since during that period two circumstances occurred - rate increases and withdrawal of stimuli - very similar to the current ones.




Here you have an evolution of the FED's balance sheet. To simplify greatly, the FED's balance sheet shows the money that the FED has put into circulation to help stimulate economic activity. At the end of the period we studied, the FED reduced its balance sheet by approximately 10% from the maximum levels reached.

It is not the objective of this short article to explain the reasons that led him to make this decision: we will only limit ourselves to explaining the effects it caused.





Here we have the evolution of bitcoin from the end of 2017 to the beginning of 2019. The drastic rise in rates, which had its peak in 2018, combined with the withdrawal of stimuli by the FED (= withdrawal of money from the market), produced a fall in bitcoin from 19,870 to 3,177 (approx.). An 84% drop.


And the stock markets, how did they react? Let's look at the S&P 500.





As can be seen, instead of starting the fall at the beginning of the year - as bitcoin did - the fall began in October. In total, it was a drop of a little more than 20%, which for a traditional stock market, is a lot.

The story ends with the FED correcting its policy at the end of 2018, with the S&P 500 recovering the highs in May 2019 - bitcoin took until the end of 2021 to recover the levels at the end of 2017.


And how is the situation right now?





As can be seen, the FED is determined to continue cutting its balance sheet (=the money it has put into the market). The increase seen at the beginning of 2023 was due to the need to inject money into the banking system to avoid the bankruptcy of regional banks.





Regarding interest rates, as can be seen, they are at a high level, not seen for more than a decade.

Together with the war in Ukraine, the rise in rates and the withdrawal of stimuli by the FED, have been the cause of the fall of the stock markets and bitcoin in the last few months.

The prospect of the FED and the European Central Bank lowering interest rates in early or mid-2024 has led to a very important recovery in the stock markets.

The doubt that currently exists in the financial and cryptocurrency markets is the following: will the history of 2017 – 2021 be repeated? That is, will bitcoin's recovery be slower than that of the stock markets? Or are we in a pause in the falls of the stock market - and, therefore, of bitcoin -, waiting for a global recession that will cause the stock markets to fall?


The H&B team.

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