by Marvin Dumont
Cryptocurrency and Bitcoin pricing models are in unchartered territory. The nascent technology is still in its infancy, and there are no long-term historical performance to draw upon (unlike gold or the stock market).
Despite the recent downturn, the crypto market is up 61% for the year. A big question for investors is what the Federal Reserve’s inflationary policies mean for the price of Bitcoin and other cryptos, which have limited supplies.
Many analysts view the Fed’s expanding balance sheet as quantitative easing (QE) in disguise: the printing of cash and diluting of the dollar supply, which reduces everyone’s purchasing power.
The Fed is now implementing QE 4, having created $270 billion since the repo crisis. The bank inter-lending crisis in September saw an extreme credit crunch among Wall Street banks, and shows the high risk still inherent in the financial system.
The Winklevoss twins and other prominent investors are bullish on long-term crypto prices due to QE. But others disagree that coin prices will rise simply because of limited supplies. In their view, intrinsic value, utility and mass adoption are what will boost prices.
The Federal Reserve (which by U.S. law is not subject to audits) does not have cash in its checking account. Yet it is allowed to write checks and buy huge amounts of U.S. treasuries from Wall Street (resulting in duplicate commissions because banks are shareholders of the Fed), as well as the Treasury Department.
There is no legal limit to QE. Let that sink in.
QE is how the Fed pumps cash into the economy. Since 2008, it has printed or created over $4.5 trillion in cash. Most of these new dollars bailed out large institutions or purchased U.S. government bonds, and subsidized the financial industry.
Thus, the Fed has created immense asset bubbles in the stock and bond markets, as well as real estate. This represents one of the great risks of the current economy: asset bubbles. It deludes some investors into thinking that things are good when in fact the financial system is currently very risky.
So when the next economic downturn takes place, what will happen to Bitcoin and other cryptocurrencies? In the short-term, these digital assets are likely to see downward pricing pressure. In the long-term, the debate continues.
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