Crypto markets could benefit from increased liquidity if the US central bank steps in to support the $75 trillion equity market in a bear market, as it is “too big and too important to fail,” according to analysts.
The US equity market has grown by 68% over the past five years and has added roughly $6 trillion in market value so far this year. However, analysts and experts, such as goldbug Peter Schiff, have warned that years of rapid growth could be setting up the market for a major correction.
Such a correction could see the Fed “break decades of precedent” and buy equity ETFs to support the stock market, Balchunas said on Tuesday, while other analysts said the resulting move to increase liquidity could set up an environment for cryptocurrencies to benefit.
“Once the Fed steps in, rate cuts, balance-sheet expansion, even targeted ETF purchases, crypto has historically entered a medium-to-long-term uptrend, similar to what we saw in 2021, as risk appetite returns and capital rotates back into high-beta assets,” Bitget Wallet chief operating officer Alvin Kan told Cointelegraph.
Stocks deeply embedded in American households
Balchunas said that 58% of Americans own stocks, so “the political pressure to keep stocks out of a prolonged bear market is going to be very powerful.”
In 2020, the Fed bought corporate bond ETFs during COVID-19 to act as a “buyer of last resort” to restore liquidity to frozen credit markets. The unprecedented move saw it acquire $8.7 billion worth of ETFs, which helped to limit economic damage from the pandemic.
“I think there’s a good chance the Fed will buy equity ETFs in the next major downturn to support [the] market, and it will be common practice going forward,” said Balchunas.
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Central banks in China and Japan currently use indirect equity ETF purchases via authorized intermediaries with public funds to boost liquidity, and America could follow, he added.
“This is just one byproduct of the ‘Nothing Stops This Train’ monetary supply explosion and debt extravaganza sweeping the world, but especially in the US, which at this point feels irreversible.”
US stock market cap growth over the past five years, as measured by the Wilshire 5000 Total Market Index. Source: Yahoo Finance
Crypto remains tied to dollar liquidity
HashKey Group senior researcher Tim Sun said that a prolonged, severe bear market “would do far more than just erode investor wealth — it would directly shock consumer spending, compromise pension stability, stall corporate credit expansion, and dent tax revenues.”
While cryptocurrencies will not receive direct backing from the central bank, “their macro pricing remains fundamentally tied to US dollar liquidity, real interest rates, and equity market risk sentiment,” Sun added.
“Once market participants are convinced that a policy floor effectively underpins risk assets, the risk premium demanded for highly volatile assets will compress. As a result, Bitcoin and mainstream crypto assets are poised to benefit significantly from improving liquidity expectations and a broader revival in risk appetite.”
Bitcoin has underperformed US stock markets this year. Source: Google Finance
Strong incentive to backstop major drawdowns
“This structural backstop supports a more resilient macro backdrop, and that’s ultimately bullish for crypto’s role as a growth and diversification asset in a world of expanding global liquidity,” Kan said.
Meanwhile, Jeff Mei, the operating chief of BTSE, told Cointelegraph that in the event of a downturn, “it’s difficult to see the Fed printing more money to stimulate it, given that inflation is still high. However, there are other tools they can deploy to take action.”
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