Crypto, Fed And The Paths They Trod

It’s the Fed’s policy day again and financial markets are awash with commentaries on what the Fed is likely to do now and what it may do down the line. Crypto world is also waiting with bated breath and a trip down the memory lane could help put into perspective, the crypto markets’ tryst with the Fed’s moves on rates and more.

Satoshi Nakamoto may have pioneered Bitcoin in 2008, but a full-fledged crypto market emerged much later. In April 2013, the size of the crypto market was less than $2 billion, comprised of around 7 cryptocurrencies. Total Assets of the Federal Reserve was around $3.2 trillion, and the Fed Funds rate was zero.

When at the end of 2015, the Fed raised interest rates to 0.50 percent, GDP was 2.3 percent, inflation at 0.1 percent and the Fed’s Balance Sheet size was around $4.5 trillion. Crypto market size was $8 billion, the number of cryptocurrencies more than 500 and Bitcoin’s price around $400.

At the end of 2017, GDP remained at 2.3 percent, but inflation spiked to 2.1 percent and the Fed Fund’s rate was steadily increased to 1.5 percent. By early January of 2018, the crypto market size increased to $800 billion as Bitcoin’s price leaped beyond $16,000. The number of cryptocurrencies also surpassed 1300 by then. The Fed’s Balance Sheet was at $4.5 trillion at that time.

In February 2018, Jerome Powell became the Fed Chair and by mid-December, 2018, the Fed had increased rates to 2.5 percent. By that time, crypto market capitalization dropped to $100 billion as Bitcoin plummeted to $3200 levels. Total cryptocurrencies exceeded 2000.

In 2019, the Fed started cutting rates and by October 2019 the Federal Funds rate had been had reduced to 1.75 percent. At the end of October 2019, crypto market cap was again near $250 billion whereas the total assets of the Federal Reserve stood at $4.1 trillion. Bitcoin traded near $9500.

By January 20, 2020, when the first coronavirus case was confirmed in the U.S., crypto market capitalization was a little less than $250 billion, as Bitcoin’s price hovered around $8,600. Fed’s Balance Sheet size was $4.2 trillion.

In early March 2020, with the onset of the coronavirus pandemic, the Fed slashed rates to 1.25 percent and to 0.25 percent a month later.

In its statement on 15 March 2020, the Fed said that in order to support the flow of credit to households and businesses amidst the pandemic, it would be increasing its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

Crypto market capitalization which had dropped to $134 billion in mid-March recovered to $245 billion by the end of April 2020. The Fed’s Balance Sheet which was at $4.7 trillion in mid-March increased sharply to $6.7 trillion by the end of April, 2020.

In its statement in June, 2020, the Fed announced that monthly purchases of Treasuries would be $80 billion and other securities would be $40 billion until further notice. By that time the Fed’s Balance Sheet had increased to $7.1 trillion and crypto market cap had increased to $264 billion.

In December 2020, the Fed hinted that it would slow purchases once the economy made sufficient progress towards the goals of maximum employment and price stability. At the end of 2020, crypto market was valued at $755 billion and the Fed’s Balance Sheet aggregated to $7.4 trillion.

By May 2021, crypto market soared to a market capitalization of $2.5 trillion as market leader Bitcoin surged past $58,000. The Fed’s assets surged to $7.9 trillion. Annual inflation in the U.S. at the end of April was 4.2 percent and by the end of May it had increased to 5 percent.

From its peak in May 2021, crypto market capitalization plunged to a low of $1.1 trillion by July 20, 2021. BTC plummeted below $30,000. The Fed’s Balance Sheet increased further to $8.2 trillion.

By early September of 2021, crypto markets recovered and market cap crossed $2.3 trillion again. Bitcoin surged past $52,000. But soon Bitcoin dropped to near $40,000 and crypto market cap to $1.8 trillion by the third week of September, 2021. Fed’s Balance Sheet size increased further to $8.5 trillion.

The life-time peak for crypto markets was in middle of November 2021. Crypto market capitalization peaked to almost $3 trillion and Bitcoin touched an all-time high of $68,789. Total assets of the Fed increased to $8.7 trillion. Annual inflation in the U.S. at the end of October was 6.2 percent.

In November 2021, the Fed started tapering its monthly asset purchases by $10 billion in Treasuries and $5 billion in other securities. In December 2021, the monthly tapering was increased to $20 billion in Treasuries and $10 billion in MBS. In March, the Fed ended its Quantitative Easing program.

In March, the Fed also increased the Fed Funds rate from 0.25 percent to 0.50 percent.

At the end of March, crypto market capitalization stood at $2.1 trillion and Fed’s Balance Sheet at $8.9 trillion. Annual inflation in the U.S. at the end of March was at 8.5 percent, the highest since December,1981.

Between January 2020 and March 2022, the Fed’s Balance Sheet increased from $4.2 trillion to $8.9 trillion. During the same period, crypto market capitalization increased from $250 billion to $2.1 trillion.

Minutes of the FOMC meeting held in March states that participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate in the plan for reducing the size of the Fed’s Balance Sheet.

Markets are expecting the Fed to hike rates by 50 basis points and are keenly awaiting to know the extent of aggressiveness in the Fed’s strategies with regard to both the interest rate liftoff and Balance Sheet runoff.

Aggregate crypto market capitalization is currently at $ 1.75 trillion, more than a percent increase in the past 24 hours. Most of the cryptos are trading in the green zone, as markets worldwide wait for the most decisive event that could be shaping the financial market landscape in the days to come.

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