2023-04-14 23:26:15
Cryptocurrencies could benefit from shifting balance sheet at major central banks
CriptoFácil – Cryptocurrencies were the biggest highlight in terms of investments during the first quarter. And even in the first few days of April, (BTC) and Ether () continue to record exponential gains.
Several traders have pinpointed their theories for this movement, but one factor has been left out of most of these analyses. It’s about the central banks and the changes they’ve started to make to their balance sheets.
Although interest rates continue to rise in the United States and Europe, the balance sheets of the largest central banks have stopped shrinking. More than anything else, this can benefit asset classes like cryptocurrencies.
What is the balance sheet?
Before explaining the impacts, it is necessary to understand how central bank balance sheets work. Since the 2008 crisis, these institutions have been buying assets from various segments of the economy. Corporate bonds, mortgages, and even stocks form part of central bank balance sheets.
The European Central Bank (ECB) and, above all, the US Federal Reserve (Fed) led this movement. To acquire these assets, central banks issue money in large quantities and buy the assets, holding them on their balance sheet.
Between the 2008 crisis and 2021, the Fed’s balance sheet grew from less than $1 trillion to peak at nearly $5 trillion. But starting last year, both the Fed and the ECB began to raise interest rates and also to dispose of these assets, selling them at market prices.
Due to the rise in interest rates and the sale of these assets, the markets experienced strong corrections towards the end of last year. After all, when a large body like the Fed enters the market as a seller, there is no one with enough capital to absorb those losses.
end of fall
However, the situation seems to be reversing at the beginning of 2023. According to data from TS Lombard, central bank balance sheets grew again in the first months of the year. Or rather, it started shrinking to smaller levels.
Shrinking balance sheets was used by central banks to control inflation that soared in 2022. But that program has apparently ended. The chart shows that the balance sheet of the world’s largest central banks – Fed, ECB, Bank of England (BOE) and Bank of Japan (BOJ) – slowed down.
This is not an increase in the balance sheet, as the curve is still in negative territory. But the decline in balance sheets has slowed, signaling the end of the asset-reduction program.
“The ‘delta delta’ has recently reversed. Possible tailwind for markets,” said Thursday’s edition of The Market Ear, referring to the decline in the size of bank balance sheets.
Benefits for risky assets like cryptocurrencies
The expansion of central bank balance sheets is widely considered bullish for risky assets like cryptocurrencies. The more they expand their balance sheet, the more money they issue. With more money in the economy, investors can take on more risk.
It is not the policy of central banks to buy cryptocurrencies, but this also benefits BTC and its peers. Especially if interest rates fall, as the demand for riskier assets – and higher returns – tends to increase.
This is because entities involved in financial markets are often the first recipients of money newly created through balance sheet expansion, according to a theory proposed by the 18th century Irish-French economist Richard Cantillon.
These entities use the money received to drive up asset prices. Therefore, this movement perhaps explains part of the recent appreciation seen in cryptocurrencies.
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