Changes in US monetary policy and their impact on the crypto market

Recently, the crypto market has undergone a significant adjustment. This downward trend aligns with market expectations and is mainly influenced by a combination of factors such as the U.S. tax season, uncertainty in Federal Reserve policies, the Bitcoin halving, and a slowdown in inflows for Bitcoin ETFs. This adjustment has provided the market with a necessary cleansing opportunity, allowing some short-term speculators to temporarily withdraw. However, long-term holders are still holding on and may increase their investments in mainstream crypto assets like Bitcoin and Ethereum.

The Federal Reserve recently announced that it will reduce the scale of quantitative tightening at the May 2024 meeting. By lowering the QT pace from $95 billion to $60 billion per month, the Federal Reserve is effectively adding $35 billion in dollar liquidity each month. This move, along with interest on reserve balances, reverse repurchase agreements RRP payments, and interest payments on U.S. Treasury securities, collectively increases the amount of stimulus provided to the global asset markets each month.

According to the U.S. Treasury Department, the quarterly financing announcement for the second quarter of 2024 (QRA) indicates that it is expected to borrow $243 billion in net market debt held by the public, which is $41 billion higher than previously estimated. This is mainly due to tax revenues falling short of expectations. To address this situation, the Treasury plans to increase the issuance of short-term notes, which may clean up the RRP, thereby injecting more dollar liquidity into the system.

Recently, in the event of a bank failure, regulatory authorities took comprehensive measures to protect depositors, which effectively provided an implicit guarantee for all deposits in the U.S. banking system. This action potentially increased liquidity support by trillions of dollars, although it has not yet resulted in a large-scale liquidity injection, it has added significant potential liabilities to the Federal Reserve's balance sheet.

Although these policy changes will not immediately lead to a significant increase in cryptocurrency prices, they may mitigate future negative fluctuations. It is expected that in the coming months, the crypto market may experience a process of bottoming out, oscillating, and starting to rise slowly.

For investors, this may be a good time to increase their positions in cryptocurrencies. In particular, some highly volatile altcoins may offer better short-term trading opportunities. Long-term investors might consider increasing their allocation to some undervalued crypto assets.

Looking ahead, it is expected that the price of Bitcoin may fluctuate between $60,000 and $70,000 until August. Recent adjustments in the Federal Reserve and Treasury policies essentially serve as a covert way to increase liquidity, which could have a positive impact on the crypto market in the future.