- 2022 is shaping up to be a bad year for Bitcoin and the stock market
- Rapid recent policy changes by the Federal Reserve indicate a tightening of financial largesse
- Interest rate increases and quantitative tightening would see institutional money flow out of Bitcoin
For better or worse, Bitcoin has become seen as a hedge against inflation alongside stocks, acting as a kind of high interest savings account during times of quantitative easing, such as we saw during the pandemic. Ever since world banks started pumping out money to rescue their economies, Bitcoin and the stock market have enjoyed a sensational rise. However, the party can’t go on forever, and the actions of the Federal reserve in the coming weeks could see the music stop and the house lights come on.
Fed is Planning Swift Economic Tightening
As far back as June 2021, the Federal Reserve said that it had no plans to rein in its spending and carry out ‘quantitative tightening’. This allowed stocks and Bitcoin to rebound and see new highs in the second half of 2021. However, the turnaround since then has been remarkable – at the most recent meeting last month, the Fed said it was planning three interest rate hikes plus accelerated quantitative easing tapering , plus discussions over accelerated ‘balance sheet normalization’ (quantitative tightening) for 2022.
This means money being taken out of the economy – essentially, the Fed carrying out a token burn.
Bitcoin and Stocks Would Suffer From Fed Actions
The actions of the Fed have a direct impact on Bitcoin and stocks because it means that money flows out of risky assets that perform well when currencies are doing badly for whatever reason and back into government bonds and associated instruments which are far more low risk, albeit with a lower rate of interest. Big money wants to keep its money.
Essentially, the Fed is promising to prick the balloon that has been expanding for almost two years (longer in the case of the stock market) thanks to the coronavirus, and unless data comes out that undermines the Fed’s intentions 2022 could be a very bad year for Bitcoin and the stock market.