Federal Reserve to Taper Money Printing That Fueled Bitcoin Bets

The $120 billion of monthly bond purchases has provided a tailwind for bitcoin as investors see the cryptocurrency as a hedge against dollar debasement in the face of ultra-loose monetary policies.

AccessTimeIconNov 3, 2021 at 9:26 p.m. UTC
Updated May 11, 2023 at 5:31 p.m. UTC

The U.S. Federal Reserve announced plans to taper its $120-billion-a-month in bond purchases, taking the first step toward winding down a post-coronavirus money-printing program that has inspired many investors to buy bitcoin as a hedge against inflation.

The Fed said Wednesday in a statement that it will reduce the pace of asset purchases by $15 billion a month starting this month. Purchases of U.S. Treasurys will drop to $70 billion a month from $80 billion, while purchases of government-backed mortgage securities will decline to $35 billion a month from $40 billion.

Under the plan, the Fed will continue to wind down its purchases by $15 billion every month until the program concludes during the middle of next year.

“The committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the Fed’s monetary policy committee, known as the Federal Open Market Committee, or FOMC, said in the statement.

The asset purchases – a form of stimulus funded by newly created money, known as “quantitative easing,” or QE – have helped to more than double the size of the Fed’s balance sheet since March 2020, to about $8.6 trillion as of last week.

Bitcoin price

The U.S. central bank left interest rates unchanged at close to 0%, but a growing number of analysts in traditional markets are predicting the Fed might have to start hiking the benchmark rate to tamp down inflation at a time when U.S. consumer prices are rising at a clip not seen on a sustained basis in three decades.

So If the Fed stays the course and tilts hawkish on inflation, bitcoin might look incrementally less attractive as a hedge against dollar debasement, and the cryptocurrency’s price could come under downward pressure similar to the predictions for the stock market.

Bitcoin’s price briefly dropped after the statement but by press time was essentially unchanged around $62,300. The Fed’s decision had been fully telegraphed by officials prior to the meeting, and thus may have been anticipated by the market.

“On one hand, tightened monetary policy may lead to less rapid growth of bitcoin demand, as many use it to hedge inflation, and less QE in theory means less inflation,” said Joe DiPasquale, CEO of the cryptocurrency hedge fund BitBull Capital. “On the other hand, the effects of the largest QE in history may lead to the largest inflation in history, regardless of the Fed attempting to scale back. If this happens, we expect demand, and prices, for bitcoin to rise to new all-time highs.“

DiPasquale said that BitBull has a price target of $80,000 for bitcoin by the end of 2021.

‘Expected to be transitory’

Fed Chairman Jerome Powell had signaled during a meeting in September that there was “broad support” to begin tapering of the asset purchases, based on a plan to complete the effort “sometime around the middle of next year, which seems appropriate.”

A growing group of high-profile investors including the legendary hedge fund manager Paul Tudor Jones II and the venture capitalist Peter Thiel have joined many crypto traders in betting that bitcoin can be effective as a hedge against inflation. That’s mainly due to the limits on new supplies of bitcoin, as hard-coded into the 12-year-old blockchain’s underlying programming.

JPMorgan analysts wrote recently that more investors are seeing the cryptocurrency as an inflation hedge.

But bitcoin also has often been highly correlated with U.S. stocks, which can come under downward pressure when the Fed tightens monetary policy, because higher borrowing costs often translate to higher financing costs for companies, potentially becoming a drag on quarterly profits.

In Wednesday’s statement, the FOMC said it noted that inflation was “elevated” but said the factors behind the consumer price increases were “expected to be transitory.”


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Bradley Keoun

Bradley Keoun is the managing editor of CoinDesk's Tech & Protocols team. He owns less than $1,000 each of several cryptocurrencies.