- Bitcoin, Ethereum, and XRP have lost momentum, with Bitcoin down 60% from its late 2021 peak.
- Jefferies analysts warn the Fed’s money printing could devalue the dollar, boosting Bitcoin.
- BlackRock’s support has made Bitcoin appealing to institutions, rivaling gold as a store of value.
Bitcoin, Ethereum, and XRP, among other major cryptocurrencies, have recently lost their momentum after a strong start to 2023. Bitcoin’s price, in particular, has decreased by roughly 60% since reaching its peak of nearly $70,000 per bitcoin in late 2021. This decline has led to a combined loss of approximately $2 trillion in the overall value of Ethereum, XRP, and the broader cryptocurrency market. Notably, this decrease occurred despite hints from a BlackRock insider about a potential market upheaval totaling $17.7 trillion.
With the Federal Reserve facing the challenge of a $33 trillion U.S. “debt death spiral,” analysts at Jefferies are cautioning that the Fed may find itself compelled to resume its money-printing activities. This scenario could potentially result in the devaluation of the U.S. dollar and ignite a surge in the price of Bitcoin, potentially rivaling the value of gold.
“G7 central banks, including most importantly the Federal Reserve, will not be able to exit from unconventional monetary policy in a benign manner and will ultimately remain committed to ongoing central bank balance-sheet expansion in one form or another.”
Christopher Wood, global head of equity strategy at Jefferies
In the spring of 2022, the Federal Reserve embarked on the arduous task of reducing its substantial balance sheet, which had swelled to nearly $9 trillion due to extensive expansion during the Covid-19 pandemic and economically damaging lockdowns. This process, known as quantitative tightening, involves the Fed withdrawing liquidity from the financial system, transferring the responsibility of freshly issued debt to the private sector.
In addition to shrinking its balance sheet, the Federal Reserve has been rapidly increasing interest rates in an unprecedented manner as it grapples with the challenge of curbing skyrocketing inflation. This aggressive approach has raised concerns among some observers that it could set off a counterintuitive “death spiral” for the U.S. dollar, ultimately driving up the price of Bitcoin.
There is a possibility that the Federal Reserve may be compelled to abruptly shift towards a more accommodative stance in response to a U.S. recession. This shift could result from an unusually extended delay in the Fed’s efforts to reduce inflation through interest rate hikes, which were necessitated by the substantial expansion of the money supply in 2020 and 2021, as outlined by Wood.
Wood suggested that if the Fed fails to execute a smooth exit from its unconventional monetary policies, it could lead to the collapse of the U.S. dollar’s paper standard. In such a scenario, both holders of gold bullion and Bitcoin could stand to benefit, according to Wood’s assessment.
At the same time, Bitcoin, and to a somewhat lesser extent, other significant cryptocurrencies like Ethereum and XRP, have experienced a notable surge in institutional interest. This surge has been spearheaded by BlackRock, the world’s largest asset manager.
Wood noted, “Bitcoin has now become a viable investment option for institutional investors, thanks to established custodian arrangements for digital assets. It is increasingly seen as an alternative store of value, comparable to gold.”
In June, BlackRock ignited a frenzy on Wall Street for Bitcoin and cryptocurrencies when its renowned CEO, Larry Fink, reversed his previous skepticism and adopted a bullish stance on Bitcoin after years of reservations.
