Analysts see crypto lift if Fed supports stock market

Crypto investors are watching a stock-market debate that may sound far from Bitcoin, but it goes straight to the fuel that often moves risk assets: liquidity. Several analysts told Cointelegraph that if the Federal Reserve eventually intervenes to support a major US equity selloff, the extra money and confidence could spill into crypto markets.

The idea is still hypothetical. Bloomberg ETF analyst Eric Balchunas said Tuesday that the Fed may buy equity exchange-traded funds, or ETFs, in the next major downturn to support stocks. An ETF is a fund that trades like a stock and holds a basket of assets, giving investors exposure to a broader market or sector through one ticker.

Balchunas said the US stock market’s size and ownership base could put political pressure on policymakers during a long bear market. He noted that 58% of Americans own stocks, and said that makes a prolonged downturn harder for officials to ignore.

Why a stock-market backstop could touch crypto

The US equity market is worth about $75 trillion, according to Cointelegraph, and has grown 68% over the past five years. It has added roughly $6 trillion in market value this year. Some market watchers, including gold advocate Peter Schiff, have warned that the pace of gains could leave stocks vulnerable to a sharp correction.

If that correction came, analysts said the Fed might be pushed toward tools that improve liquidity. Liquidity means the amount of money and credit moving through markets. When liquidity rises, investors often become more willing to own assets that swing more in price, including Bitcoin and other cryptocurrencies.

Alvin Kan, chief operating officer at Bitget Wallet, told Cointelegraph that the size and importance of the equity market give policymakers a strong reason to limit major drawdowns. Kan said possible Fed actions could include rate cuts, balance-sheet expansion or targeted ETF purchases.

Kan said crypto has historically performed better over medium and longer periods after Fed support brings back risk appetite, pointing to 2021 as an example. Risk appetite refers to investors’ willingness to hold assets that can be volatile instead of staying in cash or safer bonds.

The Fed has used ETF purchases before

Balchunas cited the Fed’s 2020 move into corporate bond ETFs during the COVID-19 market shock. The central bank bought $8.7 billion of those funds as a buyer of last resort, a phrase used for an institution that steps in when private buyers disappear and markets struggle to function.

Balchunas said he thinks there is a good chance the Fed buys equity ETFs in a future major downturn, and that such a move could become standard. He also said central banks in China and Japan already use indirect equity ETF purchases through authorized intermediaries and public funds to add liquidity.

Tim Sun, senior researcher at HashKey Group, told Cointelegraph that a long and severe bear market would affect more than investor portfolios. He said it could hurt consumer spending, pension stability, corporate credit growth and tax revenue.

Sun said crypto would not be directly supported by the central bank. He added that crypto pricing still depends heavily on US dollar liquidity, real interest rates and stock-market sentiment. Real interest rates are interest rates adjusted for inflation, and they influence how attractive speculative assets look compared with safer income-producing assets.

Sun said if investors believe policy is effectively creating a floor under risk assets, the premium they demand to own volatile assets could fall, which would help Bitcoin and major crypto assets through better liquidity expectations and stronger risk appetite.

Jeff Mei, chief operating officer of BTSE, was more cautious. He told Cointelegraph that high inflation may make it hard to see the Fed printing more money to stimulate markets in a downturn, though he said the central bank has other tools it could use.

This story draws on original reporting from Cointelegraph.