The covid-19 pandemic has put a lot of pressure on economies. Nearly every region has recorded an economic slowdown since authorities began restricting the movement of people. Some governments have tried to rescue their economies from drowning, while others have done nothing. But the US government has been contemplating a stimulus package after it became clear that the central bank is running out of options.
The release of a stimulus package will invariably affect the economy. By extension, activity in the crypto space will be shaken. Washington has delayed the release of stimulus, but this fiscal intervention seems inevitable in the long run. When that happens, will it be our cue to buy crypto? Well, read on to find out.
How Stimulus Works
During an economic slowdown, such as the one being experienced due to the current pandemic, one of the biggest challenges the economy faces is a restricted cash flow. As people are cash-constrained, the volume of money exchanging hands declines. Since the beginning of the pandemic, there has been a coin shortage in the US.
A fiscal stimulus can be achieved by having the government cut taxes or increase its spending. When taxes are reduced, people will have more disposable income, and this will encourage spending. In the latter case, an increase in government spending will inject more money into the economy, thereby bringing down the unemployment rate. In either case, the idea is to increase the motivation for spending and reduce the motivation for saving.
When people are motivated to spend, currency deflation may result because people have money but do not produce more goods and services. The proposed $6 trillion stimulus is over 40 times Bitcoin’s market capitalization. One can only imagine how disruptive releasing this money can be. As we shall see later, the package will impact bitcoin and other cryptos in different ways.
The Case for/against Stimulus
The Fed has so far tried a range of options for keeping the economy afloat, including intervening in the stock markets and dishing out stipends to low income-earning Americans. Economists usually differ on the idea of meddling with the economy. One side of the table argues for a free-market approach, while others argue that government intervention at the right time is usually the best way out.
The problem with the stimulus is that it increases the country’s debt-to-GDP ratio. As will be explained later, people are getting money for work they have not done. This is essentially like borrowing money from the future. Technicalities aside, the issuance of stimulus introduces people’s risk of not using the money for the intended purpose. Beneficiaries can hoard the money in fear of economic uncertainty. This will keep the economy under strain, making crypto appear as the more attractive alternative.
The other possibility is binge spending – yes, people tend to spend recklessly in times of inflation. This phenomenon typically results in even more inflation. The outcome? More people flock to crypto, which at such times seems immune to currency deflation.
Impact on Bitcoin/ Cryptocurrencies
#1: Increased Spending on Bitcoin
There is a possibility that when the Fed releases the $1,200 checks, many will spend the money on buying Bitcoin. When the government started rolling out the coronavirus stimulus checks, it was reported that people were putting the money into waggish uses, including the purchase of tigers, guns, and Bitcoin. Judging from sentiments expressed on Twitter shortly after the announcement, Americans were eager to spend the money on non-essentials.
One Twitter poll sought to know how many would spend their checks specifically on Bitcoin, and a whole 52% of those who qualified for the package said they were going to spend all of it on Bitcoin. The bottom line is that people spent their checks on Bitcoin, and they will do it again. If this happens, Bitcoin trading volume will increase, which will likely trigger a jump in the already-increasing BTC prices. Think about it.
#2: Devaluation of the USD
Stimulating the economy by giving people money will likely cause the USD to lose value and start fetching less on the forex market. This is because you are basically giving people money for work they have not done. Then, there is a (controversial) perception that Bitcoin and crypto, in general, is a haven for assets in times of economic crises. When these two theories are brought together, an influx in Bitcoin investment is very much conceivable.
You see, investors holding their savings in dollars fear that a devaluation of the currency (in this case, as a result of releasing stimulus) might cause them to lose a significant portion of their savings. On the other hand, Bitcoin is flourishing in the bull market. So, it is only natural for investors to turn to Bitcoin if this money is released to Americans. A likely outcome in such a case is growth in Bitcoin’s demand, which means increasing prices.
Bitcoin’s Advantages (Amid this Crisis)
#1: It’s Not Even the Value, It’s Decentralization
Bitcoin has a huge advantage over the USD in this crisis, and that’s the fact that it is decentralized. Unlike the dollar, they can’t just print more Bitcoin. This feature guarantees its investors that the risk of artificial deflation is minimized. Of course, there can be no guarantee that crypto will not see the bear run as long as the Fed keeps pumping dollars into the economy, but what are the chances?
#2: As We Speak, Bitcoin is on the Bull Run
Decentralization is great, but we can’t ignore the fact that Bitcoin is currently recording unusually impressive performance. As an investor looking for alternatives to the dollar, which is at risk of deflation, Bitcoin must not be far from mind. The way out can only be crypto since the stocks are not an option. Although share prices may see a decline if inflation indeed kicks in, it’s not a good idea to invest during the bear run. So, it looks like Bitcoin carries the day.
The coronavirus pandemic has brought with it an economic meltdown. The Fed has instituted several measures to counter the strain the economy has endured. Plans to release stimulus are before decision-makers now. This move may help relieve economic strain temporarily. However, it is likely to result in inflation. In such a case, investors might flock to Bitcoin to avoid losing their assets. If this happens, Bitcoin might become stronger, and investors’ margins will rise. In short, if the Fed releases stimulus, we could consider it our cue for buying Bitcoin.