Why do Federal Reserve decisions move bitcoin’s price?

What are QE and QT?

Quantitative easing (QE) is a central-bank policy of buying financial assets in the open market. The authorities inject liquidity into the economy to stimulate interbank activity and push down interest rates.

Quantitative tightening (QT) is the opposite of QE, entailing asset sales in the open market. QT withdraws liquidity with the aim of lifting interbank rates.

The target lending rate of the Fed is announced at policy meetings, but it is achieved through open-market operations. To lift rates, the central bank sells assets from its balance sheet to banks and other private institutions. To lower them, the Fed buys those assets from market participants.

In theory, a central bank would buy and sell only government bonds; in practice, regulators also purchase mortgage debt and even private-sector securities. The decisions depend on market conditions and policy goals.

When did QE and QT emerge?

The Bank of Japan pioneered QE. The policy was launched in March 2001 in response to the dotcom bust, near-zero rates and a lingering recession.

The new approach was seen as a remedy for the constraints of near-zero rates, which had held back growth in rich economies. In effect, central banks created new money to buy back their own government bonds—the very debts they had previously sold to commercial banks and other investors.

America announced its first QE in 2008 in response to the global financial crisis. Around the same time, bitcoin’s creator, Satoshi Nakamoto, published the bitcoin white paper.

Since then the United States has undertaken three more rounds—in 2010, 2012 and 2020. By April 2022 these measures had seen the Fed buy nearly $10trn of assets.

The biggest QE came in 2020–22, during the pandemic. The Fed’s balance-sheet doubled to almost $9trn. For comparison, US GDP in 2023 was $27trn, and the entire crypto market peaked at $2.8trn in 2021.

As of early May 2024, America is still pursuing the QT that began in mid-2022. As noted above, QT drains money from the economy by selling, in the open market, securities accumulated under QE.

What is shadow QE/QT?

Direct QE/QT is not the only way to steer the money supply. A set of “shadow” mechanisms can also exert influence.

One of the most popular tools is the reverse repo. This is a secured-debt transaction in which cash is lent against securities, with an agreement to repurchase them after a set period.

The tool gained traction after the 2012 crisis. During the pandemic, reverse-repo deals became a staple of Fed policy, with operation volumes peaking above $2.5trn in 2022.

It is widely used to provide banks with near-free loans secured by securities.

Even if the Fed is running open QT, it still has plenty of tools for localised, shadow QE—that is, injecting liquidity.

How does monetary policy affect cryptocurrencies?

A common misconception is that the crypto market stands apart from traditional finance. Cheap money that banks receive from the Fed through direct and shadow QE is used to speculate across trading venues—crypto included.

Consider the so‑called liquidity chart, which combines the Fed’s balance-sheet, reverse repo and the US Treasury’s operating account.

Red shows liquidity—the money injected or withdrawn by the Fed. Yellow is the S&P 500. Blue is bitcoin’s price.

Since early 2020, when the Fed began QE, the lines have moved in step. Almost every injection or withdrawal of liquidity has shown up in both the benchmark for big listed firms and the original cryptocurrency. The start of QT and the draining of cash likewise affected traded assets.

Bitcoin may have been designed as an alternative to a “broken” financial system, but as the crypto market grew it attracted players from the old order, with the same rules and aims. Hence the correlation.