Bitcoin: Quantitative Easing; The Fed’s Gift that Keeps on Giving
Quantitative Easing: Inflation in a Nutshell
QE is a complex policy in which open market operations between central banks and member banks create monetary expansion, meaning that more money flows throughout the economy. This is accomplished through an atypical monetary policy aiming to increase the money supply. Typically, a central bank purchases bonds and other securities from smaller public banks, which leads to an increase in liquid capital. Theoretically, this increase in cash supply mixed with low interest rates encourages consumer and commercial lending and stimulates the economy.
Sounds all in well, doesn’t it? not so fast. The process of performing QE is a major contributor to wealth inequality and the reason for this is quite simple. The demographic who own financial assets are usually wealthy and when the money supply increased, the exchange rate of the dollar was weaker in comparison to most assets. For example, say you’re at an auction and someone in the crowd is artificially driving the price higher, this is the same concept, but through inflation.
M1 Money Stock (US Liquid Asset Supply) Source: https://fred.stlouisfed.org/series/M1
Quantitative Easing is Bitcoin’s Rocket Fuel
Since the supply of currency has grown tremendously through repeated QE, anything trading against the dollar will trade stronger. Two particular assets that will reap the most reward; Gold and Bitcoin. The reason for this derives from the fixed supply both commodities have and speculation from other investors.
I am sure many of you have heard the “store of value” use case for bitcoin. This terminology originated with gold and other precious metals. The reason many, including myself consider Bitcoin a store of value is because its less prone to hyper inflation and other economic troubles due to its fixed amount. Bitcoin, like gold also serves as a hedge against the market during uncertain times which can be vital when maintaining a large portfolio. Another major catalyst for bitcoin could be the uncertainty global reserve currencies are facing.
Note: Cryptocurrency investing can be volatile. This is not financial advice.
Update
January 22nd, 2023
M1 Money Stock as of January 2023. Vertical blue line represents when I first published the article.
Bitcoin as of January 2023. Vertical blue line represents when I first published the article.
As we can see, the feds aggressive monetary policies have benefited early bitcoin investors greatly.