- The news of planned tapering can reduce the fear of inflation since it means that the fed will reduce the money printing rate.
- On the 21st of October, Bitcoin’s price made a 5% slum during the London session as investors learned of the planned $120bn tapering by the US Federal Reserve.
What is taper?
Taper is a plan by the Federal government to reduce the number of assets that it purchases every month. It is an asset purchase strategy that follows a crisis. Mostly, Tapering happens after a season of Quantitative easing.
Quantitative easing involves a stimulated purchase of assets by the Fed to increase the flow of money in a deteriorating economy.
To counter the Covid-19 induced recession, the Fed has been buying Treasury bills worth $80 billion and mortgage-supported bonds worth $40 billion every month. This has been the highest quantitative easing budget in modern history. This has raised the Fed’s assets balance sheet to an estimated $8 trillion.
The last tapering happened in 2013, following the qualitative easing that was implemented to counter the 2008 financial recession.
How tapering affects the price of Cryptocurrencies.
Institutional investors have been accumulating Bitcoin to hedge against inflation. The news of planned tapering can reduce the fear of inflation since it means that the fed will reduce the money printing rate. With a reduced fear of inflation, investors are bound to reduce their Bitcoin purchases. This leads to a decrease in the price of Bitcoin.
Given the positive correlation between the price of Bitcoin and the altcoins, a plunge in BTC’s price results in a plunge in the altcoins’ price.
On the 21st of October, Bitcoin’s price made a 5% slum during the London session as investors learned of the planned $120bn tapering by the US Federal Reserve. While the price recovered soon after, it is evident that tapering is strong enough to cause a spike in the crypto market. Being aware of this information can help both traders and investors to anticipate the consequences of such news.
While the news of the planned tapering led to a sudden plunge in BTC’s price, there was an immediate recovery due to the ongoing general bullish momentum. However, this would have led to significant losses for any futures trader with an over-leveraged long position at the time of the news. The charts below highlight the 2hr candlesticks that represent the taper-induced plunge;
Ethereum Chart from tradingview
Bitcoin Chart from tradingview
Do you plan on anticipating the effects of the next tapering news? join the bits.africa community to share your views and learn what other traders think about various cryptos’ directional bias.