For several years, the main central banks have adopted a policy of low interest rates in order to facilitate the creation of money and support the economies damaged by the various crises. The Covid-19 crisis is no exception and it is still the creation of money that remains the number one tool to prevent everything from collapsing. But where are all these billions going and what impact can this money supply have on cryptocurrencies?
The first big Quantitative Easing (QE), or quantitative easing in French, was initiated by the American Federal Bank (FED) during the subprime crisis in 2008 quickly followed by European Central Bank (ECB) and other central banks. It should also be noted that the Bank of Japan used this method several times in the early 2000s. Since then, several trillions of dollars and euros have been injected into the economy in order to cope with the various crises.
What is the Quantitative Easing (QE)?
To put it simply, in the event of a crisis, central banks can lower their key rate to a rate (very) close to zero so that borrowing money is not expensive for institutions (states, banks, companies). insurance…).
When the rate cut is no longer enough and a need for liquidity arises in order to support or revive the economy, it will simply create money. via adding a line of credit to their accounts. Institutions will then be able to borrow large volumes at a lower cost in order to reinject them into the economy. via low-interest loans to households or businesses or financial aid. Then charge for the institutions to reimburse the central bank which will then erase the credit line.
The impact and risks of Quantitatives Easing ?
During the first QE, the impact on individuals was mainly felt by lower and lower rates for mortgage loans which made it possible for households to borrow more and more easily. The financial markets have also experienced strong rebounds thanks to this mass of liquidity. This therefore leads to two observations.
Despite the risk of an increase in inflation, we realize that the first beneficiaries of this mass of money are the financial markets and that money does not circulate faster in the real economy.
The second observation follows directly from the first and we see that it is the people closest to the financial markets who benefit directly from QE, namely those invested in the financial markets and those in the capacity to borrow.
The possible impact on cryptocurrencies
In recent years, cryptocurrencies have taken an increasingly important place and today represent several hundreds of billions of dollars. The value of cryptocurrencies and more particularly of Bitcoin is subject to the law of supply and demand. (To learn more about cryptocurrencies, you can visit Cryptoast.fr). With an increasingly large money supply in circulation and institutional investors increasingly interested in active cryptos, one can reasonably expect a rise in the price of some cryptocurrencies such as Bitcoin which become diversifying and uncorrelated investment values in the financial markets.
Article produced in collaboration with the Cryptoast teams
What you must remember
- Following the monetary policies of recent years, we have seen a substantial amount of capital that has supported financial markets and inflation.
- We can therefore logically think that part of these trillions of liquidity will also support the growth of cryptocurrencies.
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