Dennis Liu, an investor and financial expert best known for online forums such as VirtualBacon, argues that altcoins, digital assets that replace Bitcoin (BTC), “feel like death” due to current market conditions.
“The end of QT is important, but it’s not QE. The Fed just stopped reducing its balance sheet by $6.5 trillion. That removes a headwind, but it’s not a tailwind. Liquidity hasn’t increased yet. It’s just stopped decreasing,” the analyst said.
Here, it is important to partially explain Liu’s argument in order to understand it. End of QT (Quantitative tightening The US Federal Reserve (or quantitative tightening) is a major macroeconomic change; However, this does not have a direct positive effect on the market..
QT consists of shrinking the Fed’s balance sheet and pulling liquidity from the financial system. Although completion has removed headwinds, liquidity has yet to increase, which explains why cryptocurrencies remain stagnant.
During QE (quantitative easingor quantitative easing) is a monetary policy used by the Fed to inject liquidity into the system. It does this through the purchase of bonds with the aim of stimulating the economy and markets.
Difference between Bitcoin and Altcoins
VirtualBacon explains that Bitcoin does not need QE, but rather QE Money supply (M2) increases. “M2 continues to grow as governments continue to issue new debt. Therefore, even in volatile macroeconomic conditions, BTC remains an attractive purchase,” he emphasizes.
To make his point, the analyst shares a graph comparing the price of BTC to the size of the Federal Reserve Balance Sheet (WALCL). This shows how changes in the system’s liquidity, expansion or contraction of the balance sheet, have accompanied major movements in BTC in recent years.
And at this point, VirtualBacon makes a difference in how BTC and cryptocurrencies work. “They are different. Their behavior depends on central bank liquidity and the business cycle, not on M2 growth,” he elaborates.
In addition, experts emphasize: Liquidity has not yet improved and US unemployment continues to rise And the manufacturing price index remains sluggish. “This is why altcoins feel like they’re dead,” he added.
More simply, unlike BTC, altcoins are dependent on central bank liquidity and economic cycles, according to VirtualBacon’s paper. So, with liquidity still not improving, unemployment still high, and manufacturing index sluggish, altcoins feel like they’re dead.
Historically, each quantitative easing cycle since 2008 has followed a distinct pattern, the analyst said. First interest rates are lowered, then quantitative easing begins, liquidity increases, and altcoins soar.
Interest rates currently stand at 4%, meaning there are no conditions for new quantitative easing. Therefore, analysts argue that altcoins have yet to show a major rebound.
What do you need for altcoins?
As CriptoNoticias explains, assets considered risky, such as cryptocurrencies, will benefit from interest rate cuts. This is because funding costs are reduced and market liquidity is increased.
For Mr. Liu, several conditions need to be met before QE returns. The first is that interest rates have fallen more than expected. “Historically, the Fed only applies QE when interest rates are near zero,” the analyst says.
Second, it states that it is necessary to first utilize liquidity in the TGA (Treasury General Account). The government shutdown has pushed the TGA to $900 billion, with about $50 billion expected to return to the market next month.
However, he said the economy would need to weaken further before quantitative easing could be restarted. In other words, the unemployment rate will increase and the manufacturing index will decline.
“These conditions have not yet been met, so QE will not materialize this year,” VirtualBacon said.
He added: “All of the altcoin rallies we’re seeing right now are temporary and not real. Until liquidity expands, each rally should be considered a trade, not a cycle.”
However, this analysis assumes that the Fed only applies new stimulus, such as QE. when interest rates are near zero.
This does not take into account the possibility that monetary policy may adapt to unexpected changes in the economy. This could impact the risk market and thus the liquidity available to altcoins.
Furthermore, factors such as geopolitical pressures, unforeseen market events or the need to stabilize certain financial sectors may motivate the implementation of measures such as quantitative easing even before all mentioned conditions are met.
