The Fed is shrinking its balance sheet at full speed, and the trading volume of crypto investment products has hit a two-year low

The Fed’s balance sheet reduction has left tech stocks and cryptocurrencies, the market darlings of the easy money era, vulnerable.

The latest news shows that the Federal Reserve will increase its balance sheet reduction efforts this week, which means that the Fed will begin to sell off the Treasury bonds that it began to accumulate nearly three years ago. According to its balance sheet reduction plan, the Fed will increase the monthly limit of Treasury bonds and mortgage-backed securities (MBS) that are not renewed to $60 billion and $35 billion, respectively, while using $326 billion of Treasury bond holdings to supplement when the coupon maturity amount is lower than the monthly limit. Since the size of the maturing coupons is lower than the new monthly limit, Treasury bonds will be reduced for the first time in September. There are $43.6 billion of Treasury bonds in the Fed's portfolio that will mature in September, which means that the Fed needs to reduce its holdings of Treasury bonds by $16.4 billion. Another $13.6 billion will be reduced in October. This will be the largest reduction before September 2023.

The Fed continues to make hawkish comments as it rapidly shrinks its balance sheet. Fed Chairman Jerome Powell reiterated that the Fed is willing to risk a recession by raising interest rates and keeping them higher for longer to curb inflation. U.S. stocks fell sharply after the remarks, which dispelled hopes of a dovish turn in the short term, a view that had helped drive bets that this year's bear market is over. Many analysts recommend avoiding large technology stocks and Bitcoin and selling cryptocurrencies.

Meanwhile, central bankers from Canada to Europe are about to test the resilience of global markets as they follow hawkish U.S. policymakers in embarking on a liquidity-weakening mission to end a pandemic bond-buying spree. The historic shift is seen as a notable threat to technology stocks and cryptocurrencies, two risk-sensitive assets that surged during the coronavirus-era market frenzy before plunging in this year’s cross-asset rout.

As balance sheet reduction and high interest rates run parallel, CoinShares data shows that trading volume in crypto investment products hit its lowest level since October 2020 last week as funds continued to flow out in August. Trading volume in these products reached $901 million last week, significantly lower than the year-to-date weekly average of $2.4 billion as of August 8.

In addition, data showed that digital asset investment products also saw a net outflow of $27 million last week, slightly higher than the $9 million in the previous week. The head of CoinShares research said that the outflow of funds from Bitcoin products was partly due to the hawkish remarks of the Federal Reserve.

Separately, cryptocurrency bitcoin had another disappointing month, falling nearly 15%, according to data provided by UK-based Acorn Macro Consulting. It was the world's worst performing asset in August this year, at the very bottom of the chart.

Bitfury CEO Brian Brooks believes that the Fed's fiscal tightening policy is not good for Bitcoin's price. Brian Brooks said that traders do not believe that BTC is an effective tool to hedge against inflation during periods of extreme fiscal tightening. Therefore, HODLers may expect BTC prices to remain relatively low at least in the short term.

Meanwhile, David Kelly, chief global strategist at JPMorgan Asset Management, claimed that investors should sell their cryptocurrencies. He believes that the Fed’s stubborn hawkish stance will bring more troubles to digital assets.

Market sentiment is not good. On the 31st, the Fear and Greed Index was 23 (yesterday it was 27). The degree of panic increased compared with yesterday, and the level changed from panic to extreme panic.

It is worth mentioning that under the macro-tightening, policies and regulations on encryption have also been shrinking, and there are no plans to promote it.

Paraguayan President Mario Abdo Benítez has vetoed a bill that would regulate crypto mining and other business activities related to digital assets. The bill will return to both chambers of the Paraguayan legislature, where lawmakers can reconsider the proposal or accept the veto.

Brian Brooks also criticized the SEC’s litigation-based approach to the crypto industry, saying regulators need to “take it seriously” and provide appropriate guidance rather than going to court.

In addition, the Monetary Authority of Singapore is considering further measures to reduce the harm to consumers from cryptocurrency transactions. The Monetary Authority of Singapore (MAS) is considering various measures, including increasing customer suitability tests, to restrict retailers' access to cryptocurrencies and limit the use of leverage and credit tools in such transactions. These measures are intended to reduce consumer risks.

Ravi Menon, CEO of the Monetary Authority of Singapore, also publicly stated that MAS has issued strong warnings to retail cryptocurrency investors and has always taken strong measures to limit retail access to cryptocurrencies. MAS believes that cryptocurrencies are not suitable for use as currency and are highly dangerous for retail investors. This is mainly due to the large amount of speculation in the cryptocurrency market and the extreme price fluctuations that make it impossible to become a viable currency or investment asset. Ravi Menon said, "Outside the blockchain network, cryptocurrencies have no useful function other than as a speculative tool. Since 2017, MAS has been warning about the significant risks of investing in cryptocurrencies."

At the same time, market voices call for clear regulation of the crypto market to facilitate the subsequent development of the market. Umar Farooq, CEO of JPMorgan Chase's blockchain division, said that most cryptocurrencies are bound to disappear except for a few dozen tokens. The financial industry has been slow to catch up with tokenized deposits because regulation has not kept up and there are not many use cases, and most of the funds in the Web3 ecosystem are used for speculative activities. Regulatory conditions need to clarify the risks involved in large transactions of tokenized deposits.