The FED Tapering: How does it relate to Crypto Space?
The Pandemic has had a major impact not only on the health of the people but on the global economy as most of the government spending is directed on economic recovery and stimulus checks for the people affected. Those spending had to stop somehow to direct the resources for growth and economic balance so that is why the FED Tapering was introduced in late 2021. Strangely enough, late 2021 was also the time when the Crypto Market started to decline so What is this Tapering that was introduced by the Federal Reserve? Does it correlate with the Crypto space?
What is Tapering? Why is it introduced?
The global economy was brought to a standstill with the shock introduction of the Covid Pandemic resulting in massive lockdowns and social distancing, to say the least. This put a halt to a decade-long positive Global GDP growth which had been soaring to positive numbers before 2020’s decline at — 4.9%. As the world slowly realized that Covid would take years to recover, the government had to put measures to keep the economy and business afloat during these trying times.
One of those measures performed was QE or Quantitative Easing which was enforced at the beginning of 2020 to help soften the blow of the lockdowns on the economy and its people. We obviously know the term QE when it was introduced during the 2008 Great Recession, it is essentially the government measure to inject money into the economy by buying assets such as Treasury Bonds or Mortgage Backed Securities.
In the aftermath of the Great Recession, many institutions such as Banks and Hedge Funds found themselves overexposed to Mortgage Backed Securities as the housing market started collapsing thus in November 2008, the government issued its first QE measures that included buying up of $175 Million in Agency Debt, $1.25 Trillion in Mortgage Backed Securities and a further $300 Billion in long term Treasury Securities. This was closely followed by QE2 and Operation Twist essentially QE3 and QE4 which brought the FED balance sheet to increase from $862 Billion in August 2007 to $4.52 Billion in January 2015.
Of course, at first glance, this should be good for everybody right as the economy is stabilized and there is more money circulating in the market which essentially means a better standard of living for everybody. Well although this measure essentially needed to be implemented at the time it has lasting effects along the way. If what we know from economics is true then more money flown in the market chasing too few goods should result in money supply inflation. This means when the Fed increases the money supply faster than the economy is growing, inflation occurs as the supply of goods produced in the market is scarce concerning the demand for it.
This brings us to the most recent QE events as on March 2020, FED introduced a slew of measures to aid the economy including buying up $80 Billion in Treasure Securities and $40 Billion of Mortgage Backed Securities every month from June 2020 until November 2021 and also further reduction of interest rates from 0.5% to 0% to stimulate lending and economic growth. This also does not include other aid such as free vaccination to the people and stimulus checks that are sent to the citizens, this then resulted in a major economic recovery in 2021 at an estimated 5.7%.
This also means a further increase in FED’s Balance Sheet from $4.3 Trillion in March 2020 to over $8.9 Trillion in May 2022 and it is at a much more rapid pace than the first QE session. So now that the economy is already stabilized, what is the measure to stabilize the money supply?
The answer is Tapering which was introduced in August 2021 and implemented later in November as the FED seeks to end its QE process. Tapering refers to the policy of slowly reducing the purchases of Bonds and Securities done by the FED. In this case, it was a reduction of $15 Billion from the initial $120 Billion purchase every month until it completely ended in mid-2022 but in December the FED decided to double down on this policy by implementing a $30 Billion reduction every month.
Tapering was effective in reducing inflation or at least slowing the rise of inflation which was already at 6.8% beyond FED expectation of 2% in November 2021. The inflation rate would further increase to an all-time high of 9.1% in June 2022 before leveling off at 8.5% in July. There are a couple of reasons for the high inflation but part of it was also because of the increasing money supply going on in the market.
Tapering was a necessary reset after all the stimulus provided for the last couple of years but of course as with any change, there will be a transition going on but it remains to be seen whether the transition will be quickly neutralized or not. So how does this relate to Crypto Space?
Does it correlate to Crypto Space?
The Crypto Space has been flying to the moon as it reaches an all-time high in 2021 with the $3 Trillion Mark in November that year, most of the growth was the result of people being at home and the hype of the crypto space which manages to attract many new people into the space. Also part of it was because of the huge increase in monetary stimulus provided by the government that most of them may have flown to the market.
As the prices of Bitcoin and other digital assets reach back to a back all-time high, a lot of investors and investments flow into the crypto space seeking another income source or simply to hedge their money from inflation. Tapering brought an end to this stimulus and paired that with rising interest rates in the USA which brought a halt to all the expectations of the crypto space. As the tapering was implemented in November 2021, many of the digital assets in the market followed a steep decline and so far in 2022 have not reached their all-time high.
This was also closely followed by the stock market as Nasdaq 100 and the S&P 500 followed the same decline from their all-time highs in December 2021. As the stimulus ends and the interest rates increase, it detracts investors from approaching risky assets such as the Crypto Space, as people seek safer instruments to protect their wealth. This can form part of the reason why the Crypto Space has been in a bear market phase for a couple of months now.
Tapering seems to be the right call as the economy should be able to sustain itself without continuous government interventions but obviously, there will be some transitions that have to be faced. For Crypto Space, it has been the tough year 2022 not only with the bear market and issues such as the Terra and Celsius case but it has to attract back its investors if the space manages to tackle its volatility issues and improve regulations.
We in Nagaya Technologies Pte. Ltd believes that there is still so much untapped potential in the crypto space for it to grow exponentially in the future. This is why we created the world’s first hybrid crypto asset called Nagaya which is relatively more stable with the tendency to increase over time. We hope that the combination of a gold backup, subsidiary projects, transparency, and legality will create a more sustainable value for all of you our long-term HODLers. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
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