Fed's money printing machine flips: what does it mean for cryptocurrencies?

The Fed is embarking on a "quantitative tightening" (QT) drive to shrink its $9 trillion balance sheet.

Analysts at crypto exchanges and financial investment firms are divided on whether quantitative tightening, which began on June 1, will end a decade of unprecedented growth in the cryptocurrency market.

A layman might think of quantitative tightening as the antithesis of quantitative easing (QE), or money printing, that the Fed has been doing since the start of the COVID-19 pandemic in 2020. Under quantitative easing, more money is created and distributed while the Federal Reserve adds bonds and other treasury instruments to its balance sheet.

The Fed plans to shrink its balance sheet by $47.5 billion a month over the next three months. In September, plans to cut $95 billion. It aims to reduce its balance sheet by $7.6 trillion by the end of 2023.

Pav Hundal, manager of Australian cryptocurrency exchange Swyftx, believes that quantitative tightening could have a negative impact on the market. He told Cointelegraph on Wednesday, “You will most likely see a slight decline in market capitalization growth.”

"The Fed has picked assets harder and faster than many analysts expected, and it's hard to imagine that this won't have some sort of impact on investor sentiment across the market."

Quantitative easing was launched in March 2020 and has had a huge impact on the cryptocurrency market. Cryptocurrency market capitalization has been depressed throughout 2019 and early 2020, but a vibrant bull run began in late March 2020 as the money printing presses kicked in, according to data from CoinGecko. The total cryptocurrency market capitalization soared from $162 billion on March 23, 2020, to a high of $3 trillion last November.

Over a similar time frame, the Fed's balance sheet increased 2.1-fold from $4.17 trillion on January 1, 2020, to $8.95 trillion on June 1, 2022. This is the fastest growth rate since the last global financial crisis, which began in 2007.

Nigel Green, chief executive of financial consultancy deVere Group, believes the market reaction to quantitative tightening will be minimal because "it's already priced in". Green said there may be a "knee-knock reaction" in the market due to the unexpected speed with which quantitative tightening is rolled out, but he sees it as just a blip.

"In addition, we expect the market to rebound soon, which means investors should adjust their portfolios to take advantage of it."

There are already signs of wage growth for U.S. workers, especially in the hospitality industry, as demand for labor remains high. Assuming wages remain high throughout the period of quantitative tightening, the U.S. could emerge from the downturn with lower income inequality. Cryptocurrency market analyst Economiser explained in a tweet on May 31 that if people end up with more cash in their pockets due to higher wages, “the cryptocurrency market could ultimately benefit” from quantitative tightening.

Swyftx's Hundal added that while the market has experienced increased volatility recently, Bitcoin (BTC) could benefit as it is now demonstrating its status as the bellwether asset. He pointed out that Bitcoin dominance is currently about 47%, an increase of 8 percentage points from the beginning of 2022. "There are different interpretations of this," he said, adding:

“It does suggest that market participants are looking to preserve the value of Bitcoin, which means that if current market conditions continue, we could see a continuation of the weakness in the altcoin market.”