Last week, the Bitcoin (BTC) hit its all-time high at $66,000, pulling numerous altcoins. Amid the bull market of cryptocurrencies, Valter Rebelo, an analyst in this segment at Empiricus, makes a brief analysis about the economic scenario and the relationship with the cryptoactive market.
The concept behind cryptocurrencies and the financial market
Cryptocurrencies updated the concept of money and technology. The term “technology”, when split in two, represents the union of Tekhno and Logus, the “study of method”. Money, in turn, is a social technology, a way of accounting, transmitting and storing value among all members that gives it credibility to buy and sell goods and services that make our way of life possible.
All these exchanges take place in markets, whether for products or services, and these markets have common participants: individuals, families and companies. They are regulated by the government and pay fees for it to utopically implement improvements in the nation in the form of infrastructure.
Individuals, families and businesses also participate in a particular market, which is the heart of the economy and which allows economic growth: the credit market. This is constituted by banks and credit financial institutions, which provide financial services and mainly transactions and transactions carried out by their depositaries.
To settle these transactions, it is common for banks to take out after-hours loans from other commercial banks through clearing houses. Interest paid on loans is short-term and influenced by the Central Bank’s monetary policy.
Central Banks, in turn, have two main objectives: to foster stability and full employment, through monetary policies. In a context where interest rates are historically low, as in the case of the United States, close to 0%, the Fed (Federal Reserve) started to apply an unconventional policy, the Quantitative Easing (QE).
It is common for the Fed to buy and sell Treasury bonds (Treasure) from commercial banks, injecting or withdrawing capital from the economy, in what is called open market operations. The difference in QE for operations is due to the greater diversity of debt securities purchased by the Fed and in terms of maturity and debt issuers, as well as the magnitude of these purchases. By buying bonds of different maturities, the Fed inflates the prices of these assets, reducing the yield on each maturity and thus lowering the medium to long-term interest. This decline in interest makes credit more affordable and the economy turning faster.
Businesses and families finance economic activities at a lower cost. Another consequence of this is the inflation of prices in the stock market, when the investor starts looking for higher returns on higher risk assets. When the BC communicates accumulative policies, the market as a whole creates a positive expectation that the Fed will continue with this same posture.
Tapering in the US: economic contraction movement
With the Fed’s announcement about the possibility of starting the tapering from November onwards, that is, reducing the purchase of bonds, a contractionary posture becomes evident, a response to the inflationary escalation that we have seen.
Depending on the speed, this trajectory of contraction can lead to a sharp increase in interest rates and a flight of capital from the risk market, resulting in large corrections.
Despite this bad scenario, the thesis of digitization of the world is not affected if it manifests itself, which is why analysts like Valter remain firm in the belief of an increasingly virtual and autonomous economy as seen in the area of crypto.
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I am an author at Global happenings and I mostly cover automobile news. In my time working in the automotive industry, I have developed a keen interest in the latest developments and trends. My writing skills have also allowed me to share my knowledge with others through articles and blog posts.
