The Fed’s Balance Sheet Declines: Will Bitcoin Rise or Fall?

The US Federal Reserve’s balance sheet declined by $8 billion in the week ending July 8. It now has a total of $6.97 trillion from the record high of $7.16 trillion in early June.

According to the Fed bank in Saint Louis, the decline was its largest in 11 years.

Fed began to launch liquidity-boosting measures to counter the economic effects of the coronavirus. This fall is a sign that the central bank is beginning to unwind it.

Earlier this year, the cryptocurrency market had anticipated Bitcoin (BTC) to fall with it. This is because the top digital coin has made a strong correlation with the S&P 500.

That said, the equity index had rallied by over 40% led by the balance sheet expansion. Naturally, investors would now expect the opposite.

But the reality considers other factors, such as the reason why the balance sheet was reduced in the first place. This comes in as good news for BTC because this means that there was a drop in demand for emergency liquidity measures.

Coronavirus-induced stress has therefore begun to ease out from “emergency mode.”

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Bitcoin Investors Should Remain Cautious

Of course, markets are still wary of the currency. The Fed recently opened dollar swap lines that caused a dollar shortage internationally.

Analysts claim that instead of Bitcoin, many would choose the greenback to invest in instead.

Meanwhile, there’s also the fact that outstanding repurchase agreements fell from $61.2 billion to zero. Said agreements, or repos, are a source of short-term funding for commercial banks.

The decline to zero again proved that coronavirus-induced stress in the currency markets had eased. Again, this could boost BTC against its greenback opposite.

Then, there’s the fact that the Fed is still injecting liquidity into the US economy. Overall bond holdings reached a new high of $4.23 trillion.

Investors should look out for the S&P 500 and the Federal Reserve to gauge their sentiment for BTC.