Mar 24, 2020 07:14 AM | Nick Chong

On March 23, in response to one of the most dramatic monetary stimulus measures ever, both gold and Bitcoin have seen strong rallies while global equity indices, namely the S&P 500 (North America) and the Euro Stoxx 50 (Europe), have sunk, reaching multi-year lows. 


On Monday morning, the Federal Reserve's Open Market Committee (FOMC) revealed its intent to purchase any number of securities that will help "support the flow of credit to households and businesses" and to "support effective transmission of monetary policy to broader financial conditions."


What the Fed is saying is that it is willing to purchase any value of securities — be that Treasuries, mortgage-backed securities (the securities that caused 2008's Great Recession), corporate debt, municipal or state debt, etc. — to stabilize the economy, even if that means trillions of dollars worth of purchases. This is why some have branded the measure "QE Infinity" — as it is decisively different from previous rounds of quantitative easing (QE), which were restricted due to limits the Federal Reserve imposed on its balance sheet


In the minutes after this measure was announced, everything from equities and gold to Bitcoin and crude oil rallied immediately off the news, with investors seemingly comprehending the "QE Infinity" announcement as a sort of lifeboat for the flagging economy. 


fed-chart.png


However, only two multi-billion-dollar assets held their gains and have continued to rally since the announcement: Bitcoin and gold. 


In the chart from TradingView.com above, since the Federal Reserve's announcement, Bitcoin has rallied 9.5% and gold has gained 4% while the futures for the S&P 500, reflective of most of the value of America-based equities, have fallen by 0.25%. 


What's especially important about these statistics is that these are some of Bitcoin's and gold's best days of 2020, accentuating the significance of the Fed's stimulus for these two assets. 


We may be on the cusp of a split between two types of assets: Those that will be boosted by historic levels of monetary stimulus and those that will underperform, even in a world where central banks are printing trillions.


Willy Woo, partner at the now-defunct crypto fund Adaptive Capital and a noted Bitcoin analyst, explained this theory in a recent analysis, remarking that in a textbook flight to safety, there are two key phases: 


  1. What we saw from mid-February to now: All assets that are liquid are quickly sold off for fiat, primarily the U.S. dollars, to fund living expenses, or business costs in the case of corporations. This was exemplified on March 12, when the S&P 500 dropped 8%, oil fell more than 8%, gold collapsed from $1,640 to $1,560, and Bitcoin saw its second-worst day ever, falling from $7,700 to the mid-$4,000s.

  2. What is likely taking place right now: Once fear starts to subside, money begins to re-enter financial markets through assets likely to rise in value amid poor economic conditions, which usually coincide with high levels of economic and fiscal stimulus. 


In this case, the assets most likely to outperform in the macro environment are gold and Bitcoin, Woo wrote. This would explain the outperformance today and why gold surged while the stock market underperformed from 2009 into 2011. 


Ari Paul, CIO of cryptocurrency portfolio manager BlockTower Capital and an ex-portfolio manager at the University of Chicago's endowment fund, corroborated this, explaining that considering the "explicit statements of 'infinite' money supply" by the Federal Reserve, he sees a high likelihood "BTC and gold [will] catch a sustainable bid even before equities start recovering." 


Bitcoin, especially, has a chance to shine. As put best by Robert Breedlove, founder and chief executive of hedge fund and consultancy Parallax Digital:


"'Infinite cash' in the Federal Reserve System means it will all eventually have zero value. Bitcoin was specifically designed as a countermeasure to this."


This piece was last updated on March 24.


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