Can the Cryptocurrency Market Benefit From Fed’s New Rate Cut?

If you’re a short-term crypto-trader, you’ll find that there are many trading opportunities for scalping the crypto-market, especially if you invest in popular cryptocurrencies like Bitcoin. But with the COVID-19 outbreak, things have certainly changed.

Being able to short sell Bitcoin through leveraged products like Bitcoin CFDs can greatly improve your trading results, as you’ll be able to make money regardless of the market direction.   

But even as the global economic outlook darkens and fears of a recession intensify due to the spread of COVID-19 (coronavirus), the price of Bitcoin may yet rebound, as many central banks are loosening their monetary policies and implementing quantitative easing programs.

Central banks around the world are implementing more accommodating monetary policies to counter the economic effects of COVID-19, especially the Fed.

Efforts to contain the coronavirus outbreak in China, as well as globally, have severely disrupted global economic activity, especially in manufacturing, travel, leisure and shopping. Moreover, this situation threatens business and consumer confidence.

The Consumer Sentiment Index

Last Friday, the University of Michigan published its Consumer Sentiment Index, which came out lower than the previous release (95.9 from 101) and reached its lowest level in five months in February.

But this US consumer sentiment figure doesn’t take into account the latest bad news about the impact of the coronavirus in the United States (and elsewhere for that matter), which means that the reading could easily keep falling in the upcoming months.

“If we look to the rest of the month of March, you’re going to see a combination of not just the expectations, but the current economic conditions fall, and that will lead to significant pullback in the final reading,’ declares Gregory Daco, economist at Oxford Economics.

“When you’re going to start to see a real disruption to consumer sentiment is when people see their daily activities being influenced by the virus,” he added.

As the coronavirus outbreak has disrupted economic activity in the United States by affecting global financial conditions, the Fed decided yesterday ‘to reduce the target range for the federal funds rate to 1/2 to 3/4 percent’.

Moreover, “in a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks”—the U.S. dollar liquidity swap line arrangements’ can be read on the latest FOMC statement.

How Are Crypto Prices Affected?

When a central bank decides to cut its interest rate and inject liquidity in its economy, this has a direct influence on many financial asset classes, especially fiat currencies. In general, rate cuts are inflationary in nature. This means that the purchasing power of the related fiat currencies is reduced.

However, since crypto-currencies are 100% virtual, and above all decentralised, they are not directly influenced by changes in the value of fiat currencies like the US Dollar. This is why some analysts believe that the general easing of central banks, especially the Fed, will be positive for cryptocurrencies like Bitcoin, which is deflationary in nature over the long-term.

After all, this brings us back to one of the most basic principles of crypto-currencies: fighting the artificial manipulation of the monetary supply of fiat currencies by offering a decentralized alternative, whose monetary base cannot be inflated whenever a centralised organisation decides.

Right now, the overall cryptocurrency is affected by a ‘liquidity crisis’ through the overall economy. That’s at least what Anthony Pompliano from Morgan Creek Digital believes. “Bitcoin and gold are doing the same thing, just as you would expect them to in a liquidity crisis…they go down. Same thing happened to gold during liquidity crisis of 2008 too,” he explained on Twitter.

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