Bitcoin (BTC) suffered when investors transferred a record amount of cash to a one-day Federal Reserve Instrument after the central bank began paying interest on that money.
US Central Bank he received On Thursday, $ 756 billion through a buyback program from nearly 70 market participants. The hidden amount is about $ 172 billion higher than last week and about $ 235 billion more than on Wednesday, when only 53 investors tapped on the option.
Reverse repo operations receive money mainly from money market funds and government-sponsored banks. Until Wednesday, the service offered eligible users interest on a zero percent return.
But after the Federal Reserve System signaled faster and earlier increase in interest rates – in 2023, instead of the previously expected 2024, the instrument moved its reverse repo rate up to 0.05% and interest on excess reserves that banks deposit 0.15% from 0.10%.
Depositing excess cash to earn interest
Excessive dollar liquidity has been pouring into money market funds, which later invest in short-term government securities, mainly due to quantitative easing for the US economy. Higher demand for these securities often sent their returns to negative areas.
Negative-yield securities in response to the Fed’s quantitative easing have proven to be one of the main bullish catalysts for bitcoins and other digital assets since March 2020. Compared to traditional debts, the cryptocurrency sector promised better returns and in some cases consistent revenues from the emerging decentralized financial sector.
But as the Fed throws curves to the markets with its hawkish tones, mainstream investors are turning to devices that seem less risky than bitcoins or gold and promise a decent return. As a result, the Fed’s repo market is recording its largest incoming cash flow.
“We seem to see a growing inverse relationship between the price of bitcoins and the Fed’s Reverse Repo market,” said Petr Kozyakov, co-founder and CEO of Mercuryo Cryptocurrency Service. Added by:
“Many investors are choosing more volatile bitcoins because they promise higher returns. However, with current market trends, some BTC investors may be downsizing because the dollar outlook is crucial at this time.”
The US dollar, which is also seen as a haven against market uncertainty, rose to 92.70 this Friday against a basket of the best foreign currencies. This meant the highest level of banknotes since mid-April. Bitcoin reacted negatively to a stronger dollar.
Will Bitcoin Overcome?
Raoul Pal, founder / CEO of Global Macro Investor, said the rise of the dollar killed the inflation story. However, the macroeconomic analyst stressed that the narrowing woes led by the Fed would not harm alternative hedging assets such as bitcoins and gold in the long run.
He noted that the US government tends to push for more stimulus packages that expand the Fed’s balance sheet. This means that the central bank is still buying government debt, pushing bond yields down. Pal said:
“My view remains that H2 is weaker than expected, and inflation fears are receding and growth is uneven. The result will be more stimulus (not tightening) in Q4.
Analyst he added that the trend of dollar recovery would stabilize in the second half of 2021. Eventually, capital would begin to flow back into the gold and cryptocurrency markets.