The logic behind the Fed's unlimited QE and the surge in Bitcoin prices

In recent years, the Fed's monetary policy has had a profound impact on the global economy. In particular, when the Fed announces an unlimited quantitative easing (QE) policy, the market reaction is often extremely intense, especially for digital assets such as Bitcoin. Recently, the news that the Fed once again launched unlimited QE has caused the price of Bitcoin to rise by 10%. This phenomenon has not only attracted the attention of investors, but also forced us to explore the logic and impact behind it.

First of all, the essence of quantitative easing is to stimulate economic growth by injecting liquidity into the market. In the case of economic slowdown or recession, central banks tend to lower interest rates and increase the money supply in the market by purchasing assets such as government bonds. This policy aims to reduce borrowing costs and encourage consumption and investment. However, the introduction of unlimited QE means that the Fed will no longer set an upper limit on bond purchases, and the openness of this policy will undoubtedly further push up asset prices in the short term.

In this market environment, Bitcoin, as a decentralized digital asset, is gradually regarded as "digital gold". Investors often turn to digital assets such as Bitcoin in order to obtain higher returns when uncertainty in traditional financial markets increases. Especially when the Fed's loose policy leads to the depreciation of fiat currencies, the scarcity of Bitcoin becomes more and more apparent, attracting more and more investors to regard it as a safe-haven asset.

Taking the market reaction in the early stage of the epidemic in 2020 as an example, the Fed launched a series of unprecedented stimulus measures, causing the price of Bitcoin to soar from about $5,000 to nearly $20,000 in just a few months. Behind this round of price increases, in addition to the market's increased recognition of Bitcoin, it is more due to investors' panic about the uncertainty of the future economy. This panic drives funds to continue to flow into the Bitcoin market, pushing up its price.

Next, we need to pay attention to whether there are other economic factors behind the rise in Bitcoin prices. For example, as the global economy slows down, central banks in many countries have adopted loose policies, which has gradually turned investors' attention to Bitcoin when looking for hedging assets. According to Chainalysis' research data, Bitcoin trading volumes in many countries rose sharply on the day the Fed announced unlimited QE, showing a positive response from investors.

In addition, the impact of social media and online platforms cannot be ignored. With the popularity of Bitcoin, more and more young investors get information through social media and participate in Bitcoin investment. Whether it is Twitter, Reddit or other social platforms, discussions and trading information about Bitcoin are endless, forming a strong market atmosphere. Especially after the news of the Federal Reserve's announcement of unlimited QE, the discussion on social media rose sharply, further driving the price of Bitcoin up.

However, although the price of Bitcoin has risen sharply in the short term, we also need to remain rational. The volatility of the Bitcoin market is extremely high, and investors are facing potential risks while chasing short-term returns. For example, the reversal of market sentiment, policy changes, technical problems, etc. may all lead to drastic fluctuations in Bitcoin prices. Therefore, when participating in Bitcoin investment, investors should have sufficient market analysis capabilities and risk control awareness.

Looking back at history, the introduction of unlimited QE is often accompanied by economic uncertainty. In this context, Bitcoin, as an emerging asset, has gradually become an important choice for investors to allocate assets. The value of Bitcoin is not only reflected in its price fluctuations, but also in its acceptance by more and more people as a global and decentralized asset. With the development of financial technology, the future of digital currency will be more diversified, and investors also need to continue to learn and adapt to this emerging market.

In general, although the Fed's announcement of unlimited QE has driven up the price of Bitcoin in the short term, behind this is the complex market logic and investor psychology. Whether it is Bitcoin as a safe-haven asset or the volatility of the traditional financial market, investors need to find their foothold in this unpredictable market. In the future, how to effectively grasp market trends and rationally allocate assets will be a challenge that every investor needs to face. In this era full of opportunities and risks, only by continuous learning and adaptation can we be invincible in the financial market.

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On the evening of March 23rd, Beijing time, the Federal Reserve announced a new round of large-scale rescue measures before the stock market opened, including unlimited bond purchases to keep borrowing costs low and plans to ensure that credit flows to businesses and state and local governments.

The Federal Reserve said it would purchase $75 billion in Treasury bonds and $50 billion in agency mortgage-backed securities (MBS) every day this week, and the daily and term repo rate quotes would be reset to 0%.

Stimulated by this news, the three major U.S. stock index futures rose instantly, and Bitcoin rose by more than 10% in just two hours, from $5,800 to $6,600.

In response, Hong Hao, managing director of Bocom International, commented on the social platform, saying that the Federal Reserve had placed all its bets tonight, and the global market was jubilant.

However, the U.S. stock market did not buy it after the opening, and the S&P 500, Nasdaq Composite Index and Dow Jones Index all fell sharply.

Faced with the widespread spread of the epidemic and the collapse of financial markets, the Federal Reserve has launched a series of rescue measures in the past week, not only lowering the benchmark interest rate to zero and announcing quantitative easing (QE) of up to US$700 billion, but also using the three major policy tools used in the 2008 financial crisis within two days, namely the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF) and the Money Market Mutual Fund Liquidity Facility (MMLF).

At present, the above measures have failed to effectively prevent the stock market from plummeting, and the three major US stock indexes have wiped out all the gains since Trump took office.

At the same time, Bitcoin failed to reflect the value of safe-haven assets in the face of crisis. The new coronavirus epidemic has caused stock markets in many countries to plummet, and concerns about the global financial crisis are increasing day by day. Bitcoin has fallen by more than 50% in two days and more than 60% in a week, and has been completely defeated. The difference in risk resistance is vividly reflected.

(Comparison of the trend of Bitcoin and the S&P 500 index from December 2019 to March 2020)

Previously, many Bitcoin believers liked to use Nietzsche's "What does not kill me, only makes me stronger" to describe Bitcoin's tenacious vitality, but there is another saying: If you don't commit suicide, you won't die. Another important reason for the Bitcoin crash this time is that almost all participants have heavily leveraged to bet on the halving bull market. When the Bitcoin price drops to a certain threshold, the leverage is blown up, and the liquidity is instantly exhausted, resulting in a series of liquidations.

Since its birth, the price of Bitcoin has risen from 0 to the current $6,000, and the market value has reached $100 billion. The premise for Bitcoin to achieve such remarkable results is that the world has just emerged from the 2008 financial crisis, and the over-issuance of currencies in many countries and the government's water release have led to the depreciation of legal currencies. Bitcoin has enjoyed a good life for 10 years.

When this major premise is removed, all the myths of Bitcoin's rise are shattered in an instant, and Bitcoin's good days are over.

From this point of view, when the global economy (note that it is the world, not a local country or region) faces the risk of recession, Bitcoin will amplify the risk. As the epidemic is brought under control and the global economy begins to prosper again, the safe-haven property of Bitcoin relative to legal currency may begin to play a role.