How Trump's Dollar Strategy Could Ultimately Affect Bitcoin

By Daniel Phillips

Translation: BeeX Exchange | Xuanxuan

Overview

To help prop up the struggling U.S. economy, the Trump administration and the Federal Reserve have pumped trillions of dollars into markets .

However, the U.S. dollar ( USD) continues to weaken against most other currencies, while Bitcoin has staged a dramatic recovery from its March 2020 crash .

If the dollar continues to falter, Bitcoin’s strength as a safe- haven asset could improve — but it likely won’t be immune to a stock market rout.

Since March , U.S. President Donald Trump 's administration, along with the Federal Reserve, has been working to prop up an economy devastated by the impact of the coronavirus pandemic .

Unlike many other economic superpowers, the United States had to deal with a long-lasting first wave of coronavirus infections, making it the worst-affected country in terms of total cases. As a result, the Trump administration and the Federal Reserve had to take extraordinary measures to keep people working and stimulate consumption.

These measures, which include cutting interest rates and injecting cash into the economy, could cause people to " opt out " of the depreciating U.S. dollar ( USD ) -- which in turn would spur interest in Bitcoin ( BTC ) and other cryptocurrencies.

What the Fed did

Those efforts range from slashing interest rates to near zero following a thrilling 1.5% cut in March to buying massive amounts of securities.

Overall, the Fed has pumped $ 2.3 trillion into the market since March through purchases of Treasurys and mortgage-backed securities , bringing its total assets to $ 7.06 trillion.

At this rate of growth, and with the United States still dealing with massive unemployment, its balance sheet is likely to continue to expand in the fourth quarter and could reach close to $ 10 trillion by the end of the year , the highest level in history.

There are also concerns that inflation could skyrocket. In his speech titled " New Economic Challenges and Review of the Federal Reserve's Monetary Policy, " Federal Reserve Chairman Powell announced that the Fed's goal is to achieve an average inflation rate of 2% over time . If the dollar weakens further, inflation could temporarily climb above 2% .

Impact on Bitcoin

Although Bitcoin’s price initially crashed by more than 50% between mid- February and mid- March of this year as the stock market suffered one of the worst sell-offs in recent history, the price of Bitcoin recovered sharply in the second and third quarters - rushing to over $ 12,000 before falling back to over $ 10,000 .

On the other hand, the U.S. dollar has not performed well during the same period, and has fallen against the euro ( EUR ), British pound ( GBP ), Japanese yen ( JPY ), Chinese yuan ( CNY ), and most other major currencies since March.

As the world's primary reserve currency, a large number of U.S. markets can be considered correlated to the performance of the U.S. dollar, including U.S. stocks, real estate, and equities. However, Bitcoin is often described as an uncorrelated asset that moves independently of major stock indices, foreign exchange, and other financial markets. As a result, it is often viewed as a hedge against the struggling U.S. dollar, protecting holders from the adverse effects of inflation.

As the dollar continues to weaken, Bitcoin’s power as a safe-haven asset is likely to continue to grow. This is the view of Simon Yu, CEO and co-founder of crypto-powered micro-tasking platform StormX , who told Decrypt:

“ As the federal government insists on printing more money and the Federal Reserve reiterates their intention to maintain inflation rates above 2% , we should expect to see rising prices across all markets. ” Yu also went on to explain that Trump’s fiscal policies could push up the price of Bitcoin in the “ near future . ”

On the other hand, Marshall Hayner , CEO and co-founder of crypto payment processing platform Metal , had the following view: " The president has expressed extreme dissatisfaction with the Federal Reserve and may seek to impose new standards on the dollar to protect its position in the post-epidemic era. "

Hayner noted that this could include the creation of a blockchain center of excellence, or a similar government body — which in turn would likely lead to a “ renewed interest ” in Bitcoin within the executive branch . He also believes that it could also lead to “ a strong push for a U.S. digital dollar CBDC to eliminate counterfeiting and increase transparency . ”

This in itself could serve to boost Bitcoin; a report earlier this year from digital asset manager Grayscale argued that interest in CBDCs , or central bank digital currencies, could drive interest in Bitcoin by highlighting its value proposition. “ Moving fiat currencies onto digital infrastructure would highlight the specialness of Bitcoin, not because it is digital, but because it is a scarce, uncompromising, apolitical currency that is available to anyone, ” the report states .

Regardless, if the Fed’s new fiscal policy ends up backfiring — and drags the stock market down with it, there’s a good chance that it will also have an adverse effect on Bitcoin. But to what extent remains unclear.