Bitcoin was struggling to build momentum in recent weeks, and the return of cash to the system raises questions about whether this could be the moment that changes the tone of the crypto market. That growing sense of anticipation already is began to appear in prices, with the total crypto market cap climbing over $250 billion from a low of $3.016 trillion on December 2nd.
What Happened: The Liquidity Injection and Why It Matters
After officially ending its multi-year quantitative tightening (QT) program, the central bank followed with 13.5 billion dollars overnight repo operation, routed through the New York Fed. The banks brought $13.5 billion in government bonds to the Fed, the Fed accepted it all and immediately injected $13.5 billion of new reserves into the system.
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The move, which is the second largest injection of liquidity since the COVID-19 crisis, effectively puts an end to years of steady declines in bank reserves, easing pressure on short-term funding markets and signaling a more favorable liquidity environment.
The crypto market reacted almost instantly. A handful of major assets started turning green within hours of the injection, with Bitcoin leading the way with an immediate break above $92,000.
The inflow was visible on a macro level as well: the total capitalization of the crypto market climbed from a December 2nd low of $3.016 trillion to $3.269 trillion by December 4th. Profit of more than 250 billion dollars in less than 48 hours
What investors should watch out for next
Ending QT leads to better liquidity and often create a bullish environment for stocks and other riskier investments like cryptocurrencies. However, while a single liquidity event does not guarantee a sustained multi-month rally, this injection stands out not only for its size but also for what it represents.
Related Reading: 4 Bitcoin Indicators That Led The Market To Rise Over The Last 2 Years Are Back
IN CNBC interview, Fundstrat’s Tom Lee stated that the Fed’s decision to stop QT will be a turning point for the cryptocurrency market. Lee pointed out that the last time the Fed ended QT the market was up about 17% within three weeks.
The last time the Fed stopped quantitative easing was in July 2019, about a year after it began shrinking its balance sheet. In the three weeks that followed, the S&P 500 rose about 5%. Bitcoin also initially rallied during the same period, but its strongest reaction came a few months later in late 2019 and early 2020.
Featured image from Pngtree, chart from Tradingview.com
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