As expectations of a Fed rate hike grow, will the crypto market really form a double-top bull market?

According to recent data from the U.S. Department of Labor, in April, the U.S. CPI increased by 4.2% year-on-year, exceeding the market expectation of 3.6%, and the growth rate hit a new high since September 2008; the month-on-month growth of 0.8% was also the highest since June 2008.

Against the backdrop of rising inflation, the Fed’s interest rate hikes are also increasing. Before the Fed actually started raising interest rates, the central banks of Turkey, Russia and Brazil had already started raising interest rates in March, and the global financial market entering a “tightening” phase seems to be a foregone conclusion.

So how will the crypto industry be affected by the expectation of deflation? Will the crypto market see a "double top" bull market like in 2013?

1. From inflation to interest rate hikes

According to a May 24 report by The Paper, Americans who shop in supermarkets have found that they can only buy food that used to cost less than 80 yuan with 100 yuan. Ms. Liya, who lives in Alhambra, California, said: beef used to cost about $5.99 per pound, but now it has risen to about $12; leeks have become $3 per pound, which used to be $1.25; and staple foods such as rice and noodles have also increased by about 5%.

Unprecedented fiscal stimulus and a surge in money supply are the root causes of all this.

First, let’s look at fiscal stimulus measures. In order to avoid a long and painful recession caused by the epidemic, the US government launched two consecutive trillion-dollar economic stimulus plans after the change of government. As of March 2021, the cumulative scale of US fiscal stimulus has reached 5 trillion US dollars.

In addition, Reuters reported on May 28 that the White House submitted a $6 trillion budget plan to Congress, which will increase spending on infrastructure, education and climate change, including a $2 trillion infrastructure plan and a $1.8 trillion family plan. These stimulus policies will undoubtedly significantly increase the money supply and increase inflationary pressure.

The second is the surge in the US money supply, which has increased by nearly 30% this year alone. The Federal Reserve has injected trillions of dollars of money in the past year, and the resulting expansion of the money supply is the largest since the Great Depression.

The year-over-year percentage change in the U.S. M2 money supply has reached 23%. According to Federal Reserve records dating back to 1981, before 2020, the year-over-year growth in M2 money supply had never exceeded 15%.

Inflation is not unique to the United States.

Data shows that Brazil's IPCA (broad consumer price index) grew 5.2% year-on-year in February, the highest level since 2017. Russia's CPI grew 5.67% year-on-year in February, the highest level since November 2016. Turkey's inflation rate this year is close to 16%.

This is the economic law: overly loose monetary policy will inevitably lead to money flooding, which in turn will cause rising prices and excessive prosperity in the financial market. What follows is the central bank's expectation of interest rate hikes, and then the financial market will begin to "deflate the bubble."

If inflation in the United States has only brought about "expectations of interest rate hikes," then the interest rate hikes in some emerging economies have been implemented in a solid manner.

For example, on March 17, the Central Bank of Brazil announced that it would raise its benchmark interest rate from 2% to 2.75%; on March 18, Turkey raised its benchmark interest rate by 200 basis points to 19%; on March 19, the Central Bank of Russia announced that it would increase its benchmark interest rate by 0.25 percentage points to 4.5%.

The question is, will the mere expectation of a Fed rate hike end the bull market in the cryptocurrency world?

2. With the expectation of interest rate hikes, will the crypto market experience a double bull market or a single bull market?

Regarding the impact of the Fed's interest rate hike, Song Bingshan, founder of Zunjia Finance, once said in response to a fan question:

"The Fed's interest rate hike is not terrible. It is a process that is gradually increased. In the early stage of the rate hike, it will have a small negative impact on the US stock market because it means that the economy is overheating. Only in the later stage of the rate hike will it have a greater negative impact on the financial market."

According to Song Bingshan, even if expectations of a Fed rate hike continue to increase, or even in the early stages of an actual rate hike, it will not have too much negative impact on the financial market.

So, the question is, if the expectation of the Fed's rate hike does not end the bull market in the stock market early, will the crypto bull market end early? After all, the U.S. stock market and the crypto market belong to different ecosystems. Perhaps the only answer to this can be found in history.

Looking back at the 12-year history of Bitcoin, perhaps we can only find a similar case in the Bitcoin bull market in 2013. But we need to shift our focus to QE.

The so-called QE (Quantitative Easing) mainly refers to the intervention method of the central bank, after implementing a zero interest rate or near-zero interest rate policy, by purchasing medium- and long-term bonds such as government bonds, increasing the supply of base money, and injecting a large amount of liquidity into the market to encourage spending and borrowing. It is also simplified as indirect printing of money.

In the first half of 2013, based on economic expectations at the time, the Federal Reserve proposed an estimated timetable for the exit of its loose monetary policy, setting an exit path from reducing QE asset purchases to completely stopping QE and then raising interest rates. This move triggered significant fluctuations in the international market, and emerging markets experienced the most serious capital outflow since 2008.

3. Does the Fed’s reduction of QE have any impact on Bitcoin?

Looking back at the bull market of Bitcoin in 2013, Bitcoin was in the first stage of the bull market in 2013. After hitting $195, Bitcoin plummeted and hit a low of $75, a drop of 61.5%.

However, in the following 7 months, after bottoming out, Bitcoin experienced another bull market, reaching a high of $1,052. If calculated from the bottom of $66, Bitcoin's increase in the second bull market was close to 1,600%.

However, the Fed actually began to reduce QE in early 2014.

The Federal Reserve launched the QE exit mechanism in 2014 and has announced three rounds of QE scale reduction arrangements, reducing the scale of QE asset purchases three times from January, February and April 2014, each time reducing the monthly asset purchase volume by US$10 billion. Since April 2014, the monthly asset purchase scale of QE has been reduced to US$55 billion, of which the monthly purchase volume of Treasury bonds and MBS is US$30 billion and US$25 billion respectively.

In summary, if the Fed's reduction of QE really had an impact on the trend of Bitcoin, it was not truly realized until one month before the "shoe officially dropped". Bitcoin experienced a bull market in April 2013 and a second bull market in the following 7 months. It was not until November 30, 2013 that the price of Bitcoin truly peaked and then turned downward.

So, will this round of bull market see a double top bull market? We will wait and see.