Federal Reserve building, Washington, D.C. (Steve Heap/Shutterstock)
The Federal Reserve’s Declining Balance Sheet Is Bearish for Bitcoin. Or Is It?
The U.S. Federal Reserve’s balance sheet is contracting, but despite popular opinion, that’s not necessarily bad news for bitcoin.
The central bank’s balance sheet declined by $88 billion to $6.97 trillion (-1.5%) in the week ending July 8, having hit a record high of $7.16 trillion in early June, according to the data source Federal Reserve Bank of St. Louis. The decline is the largest in 11 years.
The drop is a sign of the Fed starting to unwind the liquidity-boosting measures rolled out over the past four months to counter the economic effects of the coronavirus crisis. Some have anticipated a pullback in bitcoin prices as a result.
That’s because the leading cryptocurrency by market value has recently developed a relatively strong positive correlation with the S&P 500. And Wall Street’s equity index has rallied by over 40% since a slump in March, largely on the back of Fed’s balance sheet expansion.
As such, a contracting balance sheet could portend a pullback in stocks, and perhaps bitcoin.
However, zooming into the details of the Fed’s balance sheet reveals the reduction has been primarily driven by a drop in demand for emergency liquidity measures, a sign the coronavirus-induced stress in the financial system has eased.
“Less emergency funding being used is a healthy sign,” said Richard Rosenblum, co-founder of GSR. “Markets might not be able to stand completely on their own two feet, but they are at least a bit further from code red emergency mode.”
Goldilocks scenario?
Notably, dollar swap lines – reciprocal agreements between central banks to keep currency available for their commercial banks – have fallen by over $40 billion, as noted by Lyn Alden, founder of Lyn Alden Investment Strategy.
The Fed opened dollar swap lines with other central banks after the coronavirus crash caused a dollar shortage in the international markets. Therefore, the latest decline in the dollar swap lines could be considered good news.
Meanwhile, the balance of outstanding repurchase agreements, or repos, slipped to zero from $61.2 billion seen in the week ended July 1. Repos are a source of short-term funding for commercial banks. The Fed began injecting liquidity in the repo market in mid-September 2019 and ramped up the effort following the market crisis in March.
As such, the decline in repos to zero indicates that the coronavirus-induced stress in the funding markets has eased significantly.
However, the Fed is still injecting liquidity into the U.S. economy via purchases of U.S. treasuries at a faster pace. The central bank accumulated treasuries worth $18 billion during the past week, pushing the overall bond holdings to a new high of $4.23 trillion.
All in all, the Fed’s balance sheet contraction and drop in repos and swap lines appear indicative of a Goldilocks scenario for equities, given the ongoing crisis at least, and seems unlikely to pose a threat to bitcoin’s price.
The cryptocurrency would still face stronger selling pressure if stocks once more collapse on adverse coronavirus news. But the market is still showing resilience with a measured drop, even though U.S. registered 65,551 new coronavirus cases on Thursday, a new daily record, according to John Hopkins University.
At press time, futures tied to the S&P 500 are reporting a 0.33% decline, while bitcoin is changing hands near $9,170, having faced rejection above $9,400 on Thursday.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
Disclosure
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
24H Low$4.7724H High$5.12PriceMarket Stats24H Average Transaction Feen/aReturnsNumber of TransactionsPrice PerformanceAverage Time Token is HeldTwitter SentimentSearch TrendsBitcoin CalculatorCrypto to FIATCrypto to CryptoLast Updated on 10/16/21 2:45 PM CoinDesk’s Bitcoin and Cryptocurrency Calculator determines the exchange rates between major fiat currencies and cryptocurrencies – including BTC, BCH, ETH and XRP to USD, EUR, GBP, IDR and NGN…
Feb 19, 2020 at 23:00 UTCApple Pay image via Wikimedia CommonsThe bitcoin payments startup OpenNode just gained access to Apple Pay, according to the startup’s head of marketing, Ryan Flowers.This could be a boon for the small subset of merchants who want to hold bitcoin, because it allows people to spend dollars through their regular…
news As European watchdogs send troubling signals towards the Facebook-led Libra cryptocurrency, Switzerland remains willing to listen. According to a Reuters report on Tuesday, Mark Branson, CEO of the Swiss Financial Market Supervisory Authority (FINMA), said, “We are not here to make such projects impossible.” “We will respond to them with an open mind, with an attitude…
Nov 30, 2020 at 6:58 p.m. UTCUpdated Nov 30, 2020 at 7:08 p.m. UTCStablecoins ‘Pose Serious Risks’ to Financial Security, ECB’s Lagarde SaysStablecoins could “threaten financial security” if widely adopted, European Central Bank President Christine Lagarde said in an article published Monday in magazine L’ENA hors les murs.In the piece, Lagarde makes a bullish case…
news In the wake of lower cryptocurrency prices, ghost mining hackers are turning to metadata seizures. In a report issued today, cybersecurity firm Carbon Black says a well-known 2018 monero crypto mining botnet contained a secondary component capable of seizing IP addresses, domain info, usernames, and passwords. Dubbed “Access Mining,” Carbon Black researchers Greg Foss…
The Arbitrum (ARB) network experienced a "partial outage" Friday amid a surge in transaction traffic that impacted the layer-2 blockchain's sequencer.Arbitrum's sequencer stalled "during a significant surge in network traffic," according to posts across the network's social media on Friday. "We are working to resolve as quickly as possible and will provide a post-mortem as
Online trading platform Robinhood (HOOD) reported crypto trading revenue of $31 million in the second quarter, down 18% from the $38 million in the first quarter, according to its latest earnings release.The $31 million crypto trading revenue figure in Q2 was 16% of the $193 million in trading revenue across all categories, which saw a…
Web3’s failed decade In the past week, the markets have seen a huge turnaround. Now is the time for founders and builders to look to the future to the next stage of Web3. 01:45 Bitcoin Tops $93K Lifetime High As U.S. Demand Surges 01:29 DOGE Ascends Over 100% in Past Week, Traders Set $1 Price
Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies.…