The impact of policy reversal on cryptocurrencies

[Cindella]

In order to avoid the negative impact of the country's quantitative easing monetary policy, investors from various countries have turned to high-return speculative cryptocurrency markets to inject a large amount of liquidity into cryptocurrencies led by Bitcoin. However, with the current economic recovery of the developed economies, the funds originally deposited in the cryptocurrency market may weaken in the short term, leading to a reversal of market capital flows.

The shift in US monetary policy will bring a certain degree of psychological concern to the cryptocurrency market. This reflects concerns about monetary policy, and high inflation has made investors aware that interest rate hikes are inevitable. If there is a clear deflationary policy, it will not only affect the flow of short-term capital in the world, but may also affect the capital situation in the market and the psychological expectations of investors.

If the legal currency policy shifts to long-term deflation to reverse high inflation, then the capital flowing into the market will be reduced, and there will be an outflow of stock capital. This may increase the value of currencies in the cryptocurrency market. So will the large-scale adoption of cryptocurrencies force the government to devalue its currency? What is the impact of deflationary policies on the crypto market?

[1713567453]

1713567453

[Poker Player]

What is the impact of deflationary policies on the crypto market?

There are no deflationary policies. Governments want inflation because it is a way of being able to pay back what they borrow in order to spend more and more without costing them much. Another thing is that they want to put more or less limits to inflation, as the ECB greatly influenced by Germany and the memory of the hyperinflation in the Weimar Republic.

Regarding the impact, I have said it in other threads. If we had a crisis like we had in 2008 or what happened in March 2020, I believe that initially money would flow out of financial assets, including cryptocurrencies, in search of liquidity. But once the initial scare has passed, money would return to the most profitable asset which is Bitcoin.

[Gozie51]

If the legal currency policy shifts to long-term deflation to reverse high inflation, then the capital flowing into the market will be reduced, and there will be an outflow of stock capital. This may increase the value of currencies in the cryptocurrency market. So will the large-scale adoption of cryptocurrencies force the government to devalue its currency? What is the impact of deflationary policies on the crypto market?

No government will like reduced capital inflow into the market because it enable liquidity for other businesses and probability to increase GDP is high. Moreover, capital inflow make available for money to be taken out corruptly because government is corrupt. About impact in the market, I think crypto will have more adoption or increase adoption because genuine investors will likely hide their money in cryptocreency.

[paxmao]

Just as Poker Player says, you are not talking in your post about deflationary policies, but, if I get it correctly, to the possible reverse in money printing and capital injection that could potentially mean less cash available in general to the market which could potentially lead to a selling pressure in all assets, and that would include cryptos. Bitcoin is notoriously resistant to that type of scenario, but there is no doubt that it may have some effect to it. I really hope so... more opportunities for me to buy more

[The Sceptical Chymist]

If the legal currency policy shifts to long-term deflation to reverse high inflation, then the capital flowing into the market will be reduced, and there will be an outflow of stock capital.

Say what, now?  There's no way in hell the US's or any other country's monetary policy is going to turn deflationary--nor is deflation going to just happen on its own (which is possible under certain circumstances). 

Also, do you have any links to support these supposedly changing policies or conditions?  When you start up a thread like this with a bunch of assertions, it helps if you've got something to back them up.  Regardless, I don't think the crypto market is going to be in trouble, at least not in the short term--and I'm talking 3-5 years, although there certainly could be corrections.  Not with the money printing machines going 24/7 with no end in sight and government spending that's out of control.

[fiulpro]

A large scale adoption of cryptocurrencies would not make government devalue a particular currency, it would just mean that they have a new economic hold which would make them change few rules and norms but would not actually affect the basic of the society before cryptocurrencies.
- I would rather say that they might have a symbiotic relationship with the whole thing
- Bitcoins is efficiency being used by many countries and it's providing them with more options, more security.
- it might provide more stability in the long term since I do feel that sooner or later every country will start accepting cryptocurrencies like bitcoins so who are already doing that are steps ahead.

[zanezane]

What do you mean deflationary policies? I am sure that it's only being into law if there's a continuous abnormal inflation growth for consecutive years already but if not, I don't think that the government wants a deflationary policy because inflation at a small and consistent percentage is a sign of growth of the economy.

[NeuroticFish]

What is the impact of deflationary policies on the crypto market?

Reducing the inflation doesn't mean that US dollar becomes deflationary. The value keeps going down, just a bit slower.
So you started with wrong assumptions. What you'd expect the conclusion be? Something correct? Nope 

[Hydrogen]

The shift in US monetary policy will bring a certain degree of psychological concern to the cryptocurrency market. This reflects concerns about monetary policy, and high inflation has made investors aware that interest rate hikes are inevitable. If there is a clear deflationary policy, it will not only affect the flow of short-term capital in the world, but may also affect the capital situation in the market and the psychological expectations of investors.

If the legal currency policy shifts to long-term deflation to reverse high inflation, then the capital flowing into the market will be reduced, and there will be an outflow of stock capital. This may increase the value of currencies in the cryptocurrency market. So will the large-scale adoption of cryptocurrencies force the government to devalue its currency? What is the impact of deflationary policies on the crypto market?

I think its not so much "deflation" as it is the supply of fiat in circulation shrinking.

Remarks by Governor Ben S. Bernanke
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia
March 2, 2004
Money, Gold, and the Great Depression

https://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm

(Search the above piece for keyword "contraction".)

Ben Bernanke commented on this very topic in reference to the Great Depression. Which he acknowledged was caused by a period of high inflation followed by a contraction of the money supply.

That would be the most obvious comparison to make.

Economies and business have evolved. An identical trend today won't necessarily carry a 1:1 equivalent effect to what the world experienced in the late 1920s. But given the past precedent, we do have history to draw upon to make a better analysis.

[wxa7115]

What is the impact of deflationary policies on the crypto market?

There are no deflationary policies. Governments want inflation because it is a way of being able to pay back what they borrow in order to spend more and more without costing them much. Another thing is that they want to put more or less limits to inflation, as the ECB greatly influenced by Germany and the memory of the hyperinflation in the Weimar Republic.

Regarding the impact, I have said it in other threads. If we had a crisis like we had in 2008 or what happened in March 2020, I believe that initially money would flow out of financial assets, including cryptocurrencies, in search of liquidity. But once the initial scare has passed, money would return to the most profitable asset which is Bitcoin.

And not only this behavior has been observed during the last crises but it is one that repeats itself over and over through history, it is just common sense really, at the beginning of the crisis people get scared or they need money to pay for the new expenses they have and during that time they do not sell their useless assets but the good ones as they are trying to raise cash.

This means that everything goes down including good assets, but after this panic passes smart investors take a look at the situation and decide to put their money in good assets that are incredibly cheap at the time and make a fortune in the process.

[hatshepsut93]

Deflationary policy would mean destroying existing money supply, no government can afford that. Imagine raising billions through taxes and quite literally burning them - how would the government even operate after that? And if the government simply stopped printing money, it would be quite a weak deflation that won't be felt immediately.

But if you somehow imagine a country undergoing a strong deflation, then indeed there will be less interest in investing in cryptocurrencies, because there will be less interest in investing in general.

[20kevin20]

If there is a clear deflationary policy, it will not only affect the flow of short-term capital in the world, but may also affect the capital situation in the market and the psychological expectations of investors.

Might be wrong, but doesn't this actually possibly make crypto worth less in terms of USD?

Bitcoin is deflationary, USD is inflationary. Hence, USD becomes worth less in time and Bitcoin does the opposite.. because the USD purchasing power is being lost in time while Bitcoin's purchasing power increases.

If USD goes deflationary together with BTC, both earn purchasing power in time. If this happens, it is possible that USD will catch up with BTC in terms of deflation rate. As a result, USD gets more power.. so perhaps you can buy 0.1 BTC with $4k today but in 6 months with deflationary USD you'll be able to buy 0.12 BTC with the same amount. Deflationary currencies have the capability to potentially cancel Bitcoin's effect against inflation.

Not an economist though, so this statement might very well be dumb. Someone feel free to correct me.

[paxmao]

...

I think its not so much "deflation" as it is the supply of fiat in circulation shrinking.
...

I recently read about the statement made by the US government about removing the stimulus that is currently available in a target date of three months. It has already had the effect of causing quite a drop in price of those companies that had the highest, and many time unjustified, P/E ratios (ouch!). It should also have a heavy effect on those that were basically living on borrowed time and borrowed money, but that may hit later although harder I believe.

So... the lifeline for the zombies has run out - in Buffet´s words, let´s see who is swimming without underwear.

[arallmuus]

Might be wrong, but doesn't this actually possibly make crypto worth less in terms of USD?

The policy will increase the value of USD and at the same time probably increase the interest rate for US Treasury Yield. If the interest rate increase then capital that went into crypto might start flowing back into US Treasury Yield that means crypto market in general will have lower marketcap and that means lower price for all cryptocurrency

Bitcoin is deflationary

Its not really deflationary though because the max supply is 21M bitcoin but if you put in all those lost bitcoin that might never be recovered then yeah you can say that it is kinda 'deflationary'

[magneto]

It's a very interesting point that you make.

However, I don't think that some of the assumptions are true.

You mentioned is that countries will see a tapering off a quantitative easing and the like due to improvements in their economic outlook - the GFC has told us otherwise and interest rates remained low for years afterwards, and tapering off any sort of economic stimulus is generally not very popular with the masses.

Plus, I don't think that BTC adoption/growth is necessarily driven by the availability of cheap money - rather, it is just its own asset class with very little correlation with the fiat economy.

[Darker45]

I'm afraid you're worrying on something which surely won't happen, at least not while the current economic system is in place. You cannot expect a deflationary policy from any government. On the contrary, governments are exerting much effort to combat deflation in order to increase economic growth and provide stability.

Yes, central banks may constantly inflate and deflate the circulating supply of fiat, but that doesn't mean a deflationary policy is now taking place in lieu of inflation. That is only meant to temper inflation or to hit the right inflation target, which is mostly 2-3% annually.

[so98nn]

[...]So will the large-scale adoption of cryptocurrencies force the government to devalue its currency? What is the impact of deflationary policies on the crypto market?

Never. There is just not enough money in the crypto currencies as whole to create inflationary situation in the traditional banking system. I think we should understand that banking and government will never get hampered with what happens in the crypto. The whole BTC's market capitalisation is GDP of China in a year and cost of running the whole military system of USA. Lolz.

Large or Largest scale adoption of crypto currencies won't hamper government system. That's just not possible because the monetary system of government is very rich, plus let's not forget they have decision making power. If they ever think crypto is getting way above the limits, then they will simply decommission it.

[hugeblack]

Why do we see things as black and white, meaning that when there are problems with inflation or deflation, the only solution is cryptocurrencies? And how did Bitcoin resist all these things over the coming years?

High inflation and low interest rates will make holding cash useless and therefore investors will resort to some solutions such as gold, real estate, stocks and sometimes Bitcoin, and therefore an increase in liquidity is possible.

But the opposite does not mean that the cryptocurrency market will continue to recover.

[slaman29]

If the legal currency policy shifts to long-term deflation to reverse high inflation, then the capital flowing into the market will be reduced, and there will be an outflow of stock capital. This may increase the value of currencies in the cryptocurrency market. So will the large-scale adoption of cryptocurrencies force the government to devalue its currency? What is the impact of deflationary policies on the crypto market?

I don't really know well enough if deflationary policies work but I think in Japan where it is famous for longterm negative interest rates it doesn't seem to have worked because price of items I am told have kept the same but price of services and real estate (so this affects home buying and rental) keep going up.

I don't think any government looks kindly to devaluation as it's a sign of admitting that you're bad at economy management.

[Obito]

Why do we see things as black and white, meaning that when there are problems with inflation or deflation, the only solution is cryptocurrencies? And how did Bitcoin resist all these things over the coming years?

Probably because we can't wrap our heads around the fact that there are gray areas and that there are different options out there that needs to be addressed, I mean it's pretty easy to deal with two instead of e or more right?