What is the difference between a reserve requirement ratio cut and an interest rate cut? How will Bitcoin be affected?

Faced with the global liquidity crisis, many central banks have proposed "interest rate cuts" one after another, causing great shock to the market. Even the Fed's interest rate cut directly caused further panic in the market, and Bitcoin and other currencies fell in tandem. So what is an interest rate cut? What is the difference between it and the targeted reserve requirement cut announced by the People's Bank of my country? And how will Bitcoin be affected?

Targeted reserve requirement ratio cut refers to the central bank's targeted reduction in the statutory reserve ratio to encourage financial institutions to allocate more funds to industries and fields in the real economy that need support.

In order to prevent commercial banks from blindly lending and failing to honor depositors' deposits, the central bank will require banks to submit a certain proportion of the deposits they absorb to the central bank, which is what we call the deposit reserve. If the reserve ratio is 10%, then 10 out of 100 deposits will have to be submitted to the central bank. Therefore, lowering the reserve ratio means reducing the deposit reserve, so that banks have more money to lend, and there will be more funds in the market. Therefore, lowering the reserve ratio is generally called "flooding the market."

On March 16, the central bank announced that it would implement a targeted reduction in the reserve requirement ratio on Monday. Specifically, the central bank implemented a targeted reduction in the reserve requirement ratio for inclusive finance, and targeted reductions of 0.5 to 1 percentage point for banks that met the assessment standards. Don't underestimate this percentage point, which can release up to 550 billion yuan of long-term funds.

Interest rate cuts refer to lowering deposit and loan rates and adjusting discount rates accordingly. Banks use interest rate adjustments to change cash flow.

It can be simply understood as follows: the interest you get from bank deposits is reduced, and the interest you have to pay for bank loans is also reduced. In this way, many people will not choose to put their money in the bank. With lower loan interest rates, people's willingness to borrow money will also increase.

Therefore, when the bank cuts interest rates, the income from depositing money in the bank decreases, so the interest rate cut will cause funds to flow out of the bank, and deposits will be converted into investments or consumption, resulting in increased liquidity. When interest rates fall, investors' deposit income becomes less, so they will be more willing to take out money for investment, such as buying stocks and houses. Correspondingly, the loan costs of enterprises and individuals will also decrease, making more people willing to borrow money for investment.

The biggest difference between lowering the reserve requirement ratio and lowering interest rates is that the former releases money, increases the amount of market funds, and allows more hot money to flow; while the latter does not increase market funds, but only changes the direction of people's funds and encourages people to consume and invest more.

Compared with the quantitative tool of RRR cut, the central bank is much more cautious about the price tool of interest rate cut, because interest rate cut has a greater impact than RRR cut, and the market is more sensitive to interest rates. Therefore, since 2012, my country has cut the RRR several times almost every year, which has become a routine operation, but the RRR is often cut but the interest rate is rarely cut. Because the change of the market money supply mainly affects financial institutions; while the adjustment of prices directly affects the entire market, it will immediately cause changes in the market's attitude and behavior.

Why do these operations affect Bitcoin? This has to do with the four consecutive meltdowns in the U.S. stock market.

At 21:34 Beijing time on March 9, the S&P 500 index fell 7% during the day, triggering the first-level circuit breaker mechanism, which was also the second circuit breaker in the history of U.S. stocks;

On the evening of March 12 Beijing time, the Toronto Stock Exchange in Canada suspended trading, and the S&P 500 index triggered the second circuit breaker of the week and the third circuit breaker in the history of U.S. stocks;

On the evening of March 16th Beijing time, the third circuit breaker this month was triggered, and the fourth circuit breaker in the history of the U.S. stock market;

In the early morning of March 19th Beijing time, the S&P 500 index widened its decline to 7%, triggering the fourth circuit breaker this month and the fifth circuit breaker in the history of U.S. stocks.

The reason behind the circuit breakers is largely due to panic-induced selling. This cannot but mention the interest rate cuts implemented by the Federal Reserve during the continuous circuit breakers.

On March 16, the Federal Reserve urgently announced a 100 basis point interest rate cut to 0-0.25% and announced the launch of a $700 billion easing program. This move is the largest action in the history of the Federal Reserve. The interest rate cut and quantitative easing policy were completed in one day, and it was only 12 days after the last emergency interest rate cut.

It should be noted that the Federal Reserve has been "raising interest rates" before. Although interest rate cuts are beneficial to stimulating the economy, market investors have never seen a continuous "interest rate cut" in a short period of time, and the direct interest rate cut to "0" has given market investors a sense of panic - there is no more room for further cuts. When the market is confident, interest rate cuts will bring benefits to stimulate the economy, but once the market lacks confidence, the benefits become negative. As a result, the panic mentality has also spread to the Bitcoin market, triggering a sell-off. At a time when liquidity is extremely scarce, Bitcoin, as a high-risk alternative investment asset with the highest volatility in the world, will naturally withdraw funds from it in search of safer and more liquid assets, and the price will plummet.

The recent global market crash reflects the huge uncertainty in the market. The liquidity shortage and uncertainty of global economic growth have led to the Fed's decision. If the panic caused by the global spread of the virus cannot be dissipated in a short time and directly affects the global financial economy, then this time "the Fed lowering the base interest rate to zero" is just a key to open Pandora's box.