Crypto Will Likely Benefit from the Fed’s Next Crisis

by Juan Villaverde
By Juan Villaverde

Well, it looks like a saga we all thought was behind us is entering a new chapter. And it’s likely going to be bullish for crypto.

And the main actor behind it? The U.S. Federal Reserve.

To fully explain, we need to go back to 2020.

At the height of Covid, central banks the world over set their printing presses on high to support their economies in the face of lockdowns and supply shortages.

In the U.S., the Fed encouraged banks to buy government debt in the form of U.S. Treasurys. As it had for the preceding decade of overzealous printing following the economic struggles of 2008.

Silicon Valley Bank was one institution that took the tidal wave of deposits it got during Covid and invested the lion’s share in U.S. Treasurys.

And to an extent, it made sense. After all, U.S. Treasury bonds are considered the world's safest asset, the foundation upon which the global financial system rests.

Well, that was true … until inflation hit. And it hit hard.

Now, banks holding U.S. Treasurys realized their notes were only worth roughly 30% to 50% less.

Even still, no one panicked. That’s because those notes would be worth their full face value at maturity. So long as the banks had no need to sell early, things would be fine.

And they were … until the Fed acted again.

To fight inflation, the Fed raised interest rates all the way to 5%. Legions of yield-starved savers found that impossible to resist. So, they started emptying their savings accounts and moving the money out of banks and into to higher-yielding money funds.

The demand for withdrawals was too much for the banks to handle, leading to a real pickle: Sell the immature bonds at huge losses or face a run on deposits.

This is what led to the Banking Crisis that culminated in March 2023. And that’s when the Fed stepped in to play hero. It announced the new Bank Term Funding Program (BTFP), which guarantees the Fed will buy back bonds from banks at full face value.

At the time, the Fed said this program would only last one year. Which makes sense — this was only ever meant to be a temporary solution to a temporary problem.

But that plan relies on one thing: the bond market recovering in that year.

Which it hasn’t fully. At the time of writing, bonds are still down 20% to 35% from their peak. In fact, the only reason we haven’t seen more bank failures is because the BTFP is still in effect. And it is sorely needed.

Surely, in light of this, the Fed has extended the life of the BTFP, right?

Wrong. Last week, Fed Chair Jerome Powell announced the opposite, that the BTFP would officially be ending on March 11, 2024.

Now, there are two ways the Fed can move forward with this. And both are bullish for crypto.

Scenario 1: In order to end the BTFP and prevent the banks from facing insolvency, the Fed could cut interest rates and stop its quantitative easing policies.

This would generate a boost in the bond market, which in turn would boost crypto. The only downside is this approach could give inflation enough room to take root again.

Scenario 2: The Fed ends the BTFP but keeps rates high. That would lead to a resurgence of the banking chaos, at which point the Fed will then have to pump in liquidity into the market even more aggressively than before.

And, as I’ve explained before, crypto is uniquely sensitive to waves of new liquidity hitting the market.

Either way the Fed reacts to avoid disaster, crypto stands to benefit.

This just may be a golden ticket for crypto investors as we gear up for 2024’s bull run.

As I said last week, Bitcoin’s correction doesn’t look like it has much longer to go. I’d say use this time to make sure your portfolio is set to ride the next run up.

Best,

Juan Villaverde

About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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