Introduction: Thinking that the price of the currency is based on Bitcoin itself is actually reading "the face of the Federal Reserve Board".
Welcome to the third installment of the Chain Knowledge series. Following on from the previous issue, where we looked at the nature of money, explored the fiat trust crisis and the birth of Bitcoin, and understood why decentralized money is unique in the modern financial system, this issue will continue to delve into an equally important but often overlooked topic - quantitative easing (QE) and quantitative tightening (QT). These seemingly distant macro monetary policies are actually having a profound impact on the familiar crypto asset market.
You think the price of the currency is based on Bitcoin itself, but you're actually reading the face of the Federal Reserve Board. Imagine you're focusing on the technical potential of an emerging blockchain project when suddenly the price plummets by 15%. You're full of questions and scouring tweets and links, only to discover that what triggered the avalanche wasn't the project's bugs, or the security breach, or the runaway development team, but rather the interest rate statement from the U.S. Fed - "Interest rates are expected to remain high through the end of the year," the Fed said. - "The policy of high interest rates is expected to continue until the end of the year."
This is not a coincidence, but part of the deeper logic of the entire cryptocurrency market: fluctuations in the price of the currency have long been driven not only by the blockchain itself, but are tightly bound by macroeconomic policy, especially monetary policy. Bitcoin was born out of distrust of the central bank system, but it has had to coexist and even resonate with it in reality. Especially since 2020, the Federal Reserve Board has become the de facto "sentiment controller" of the global capital markets: a single line of text is enough to blow up bubbles and to burst illusions.
Web3 has moved from being a marginal rebel to being part of the global asset allocation, which means that it can no longer develop on its own outside of macro trends. For the uninitiated, understanding what is interest rate and what is QE/QT is no longer a subject for economists, but a must for mastering the life and death cycle of Web3.
What is QE and what is QT?
Many people think that "QE means central bank printing money", but in reality, Quantitative Easing (QE) is not about giving money directly to you and me, but about the central bank purchasing a large amount of assets in the financial market, mainly government bonds and mortgage-backed securities (MBS). The purpose of doing so is to let the banks have an extra amount of "reserve funds" on hand, just like your wallet becomes bigger, naturally more daring to spend or lend money to others.
When these banks have the capital, they will release more loans to promote corporate investment and consumer spending, thus "revitalizing" the economy as a whole. This is like a large-scale capital irrigation operation, which makes the market feel that money is cheap, easy to borrow, and has plenty of liquidity. In contrast, Quantitative Tightening (QT) is a slow pumping back of water. The central bank stops buying assets and even sells off the bonds it holds, banks have less reserves on hand and are less willing to borrow, and the overall market becomes tighter on capital and more conservative in its investments.
This is like the central bank turning off the air-conditioning to cool down the market after the economy has overheated. The key word here is "reserve", which can be thought of as a bank's "readily available cash stock", and "liquidity", which is the amount of money flowing in the market and how quickly it can be used. When liquidity is high, assets such as stocks and Bitcoin are easily pushed up; when liquidity is tight, prices tend to fall.
But what really drives the market is often not the action itself, but the "expectation". Markets are like sympathetic audiences, as soon as the Federal Reserve Board hints at a possible rate hike or contraction, even if nothing has been done yet, capital may flee from high-risk markets in advance. Bitcoin's surge from QE in 2020 to its plunge after QT in 2022 is a perfect illustration of this "expectation vs. action" scenario.This also brings us to a paradox: even though Web3 claims to be decentralized and free from control, the movements of capital still cannot escape the "invisible hands" of the central bank.
Interest Rates: The Market's "Blood Pressure Gauge" and the Risk Asset's Rhythm Controller
The central bank's adjustment of interest rates is like a rhythmic control of the market's heartbeat, and its impact centers on changing the balance between the supply and demand of capital. From a macroeconomic perspective, interest rates are one of the key variables in determining overall economic activity. A rise in interest rates represents a tightening of monetary policy, dampening investment and consumption and lowering aggregate demand, while a cut in interest rates stimulates the economy, boosting demand and output.
Market sentiment plays a catalytic role in this process. When investors are optimistic about the future economic outlook, risk appetite increases and demand rises; on the other hand, pessimism suppresses investment and consumption and demand shrinks. From a macroeconomics perspective, changes in interest rates have a direct impact on the cost of borrowing, changing the behavioral decisions of individual consumers and businesses. Rising interest rates increase the cost of capital, reduce corporate investment and consumer demand for loans, and shift the demand curve for capital to the left, resulting in a relative tightening of the supply of capital, which pushes up the "price" of capital.
Interest rate cuts work in the opposite direction, lowering the cost of capital, leading to increased demand and accelerated market liquidity. As a result of this interaction between supply and demand, the price of risky assets naturally fluctuates. In a rising interest rate environment, the cost of borrowing rises, investors become cautious, and demand for risky assets decreases, putting pressure on prices; while interest rate cuts stimulate an inflow of capital into risky markets, pushing up prices.In an ideal cyberpunk utopia, finance should be a symbol of freedom with no borders, no censorship, and no restrictions. In reality, however, even in the decentralized crypto market, the invisible "interest rate line" still profoundly shapes the supply and demand of capital flows.
Looking back at the crypto bear market since 2022, the Fed's successive interest rate hikes have raised the 'price' of money, causing investors to gradually scale back their demand for risky assets. The fluctuations in the price of Bitcoin and Ether have almost become a reflection of the supply and demand for monetary policy adjustments around the world. As interest rates continue to rise and the cost of capital increases, investors are forced to re-evaluate the return and risk of holding crypto assets. The supply of capital has tightened and the inflow of hot money into the crypto market has decreased dramatically, resulting in a funding gap for the innovative and free blockchain ecosystem.
The logic behind all this is clear: interest rates, by regulating the supply and demand for capital, influence global investors' judgment of risk and capital allocation. Risk appetite ebbs and flows with changes in the cost of capital, and the withdrawal of capital from cold wallets is a natural response to changes in supply and demand. This synchronization with traditional market dynamics is tacit proof that no matter how decentralized capital is claimed to be, its flow is ultimately subject to the laws of supply and demand in the macroeconomy and the rhythms of central banks.
One can not help but ponder: this seemingly technological subversion of the revolution, whether subconsciously by the invisible glove of macro policy, the shackles of capital supply and demand?
QE Bulls, QT Bears: How Funding Waves Shape Crypto Market Ups and Downs
Quantitative easing (QE) and quantitative tightening (QT) are not only a numbers game on the central bank's balance sheet, but also a weathervane for market sentiment. during QE, the central bank buys large quantities of bonds, which pushes low-cost capital into the market, risk appetite is activated, and the prices of all assets tend to be pushed up together. in QT, on the other hand, the market is drained of liquidity, and capital is tightened up, with risky assets being the first to bear the brunt of the problem.
Under this mechanism, the price fluctuations of cryptocurrencies have become more and more like the variations of traditional assets. 2020, after the global epidemic, the United States launched a massive QE, printing unlimited amounts of money, and capital flooded into the market, which gave rise to the bull market of mainstream currencies, such as Bitcoin and Ethereum. At that time, the spirit of cyberpunk seemed to merge with the capital frenzy, and the ideal of decentralization shone brightly under the impetus of capital.
However, when the Federal Reserve Board started to implement QT and slowly reduced its watch, the market's capital chain began to loosen. Risk aversion rose, trading volumes shrank, many innovative projects were cut off, and the ecosystem was plunged into winter. At this point, the once "free revolution" became more and more like a rich man's game: the inflow and outflow of capital was backed by the decisions of a few giant asset managers and sovereign wealth funds, while the fate of the retail investor was hijacked by the wave of volatility.
This phenomenon reminds us that even if cryptocurrency technology is more advanced, without a stable capital flow and macro-environmental support, the whole ecosystem will still be unable to escape the fate of ups and downs.Web3 is not only a technology track, but also a capital track. Macro policies control the direction of capital and influence market sentiment, which in turn affects the value of the tokens you and I hold in our hands. This game is much more complicated and profound than it appears on the surface.
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Inflation and Deflation: The 'Invisible Hand' of Crypto Asset Valuation Models
Inflation seems to be the panacea or the death knell of macroeconomics, and it is a nerve-wracking issue for the market. Conventional wisdom suggests that inflation inevitably pushes up asset prices, but the reality is far more complicated than it seems. For crypto assets, inflation and deflation are not just a reflection of price changes, but a combination of market sentiment, trust mechanisms and capital flows.
For example, as the purchasing power of the French currency continues to decline in an environment of high inflation, people are looking for safe-haven assets, which should theoretically boost the value of scarce assets such as Bitcoin. However, the crypto market's reaction is not purely linear. When inflation leads to soaring interest rates, it increases the cost of capital, which in turn suppresses risk appetite and creates a two-way pull on prices.On the other hand, in a deflationary environment, a sustained fall in asset prices will trigger panic selling, tightening liquidity in the crypto market, and the valuation models are facing re-adjustment. At this point, cryptocurrency holders must find a balance between rationality and emotion.
This seemingly contradictory dynamic mirrors the logic of the crypto ecosystem, which is still mired in traditional capital markets. Although we hold decentralized tokens in our hands, we cannot completely escape the invisible influence of the macro economy. The emancipatory ideals of technology are constantly being led by the "invisible hand" of inflation and deflation in the real-life capital chain.
Readers can't help but ask: Is it the scarcity of the asset itself that we're looking to save value on? Or is it a reflection of capital sentiment and macro-policy? To what extent has this crypto revolution become part of the traditional economic game?
When Central Banks Speak Their Minds, Is Web3 Really Decentralized?
Central bank interest rate decisions, asset purchase programs, and seemingly a single statement can influence the direction of global capital flows and the lifeblood of the Web3 ecosystem. The crypto world, once seen as anti-conformist and anti-authoritarian, is now like a flower in a mirror or a moon in the water, reflecting the shadow of traditional financial policies.
Behind this seemingly technological revolution is the reality of huge amounts of capital dancing to the rhythm of central banks. Capital is chasing risk and return, not the ideal of pure freedom. Is the vision of decentralization being diluted in the actual flow of capital? Or is it just another mask under the rules of the capitalist game?
One cannot help but ask: Is Web3's "decentralization" a technological innovation or a game of redistribution of capital power? When the ecosystem of the cryptocurrency community is being driven by traditional monetary policies, will true "freedom" still have a place? Or is it quietly becoming a part of the rich man's game?
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Conclusion: Will the next round of QE be Web3's last chance?
Quantitative easing (QE) is like a capital feast, but also a risky gamble. The past rounds of QE have breathed life into the crypto market, but they have also made Web3 more and more dependent on traditional finance. With the next round of QE on the horizon, will this be the crypto world's last gasp, or will it be the beginning of the end for the traditional order?
Readers may wonder: if the chain of capitalization breaks, can technology and ideals sustain the revolution on their own? Or is Web3's fate destined to be tied to the decisions of central banks around the world, unable to escape the influence of macro-policy?This macro and micro intertwined drama is still playing out. Behind every central bank decision, there is a battle between freedom and control, ideal and reality. The next round of QE may not only be a financial operation, but also a metaphor for the future life and death of Web3.
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