Don’t count on China’s trillion-dollar stimulus to rescue Bitcoin

As a seasoned investor with over three decades of experience navigating various financial markets, I find myself skeptical about the idea that China’s liquidity stimulus will have a significant impact on Bitcoin prices. While it’s always exciting to hear rumors of potential market catalysts, I’ve learned throughout my career that the devil is in the details.

Might an influx of fresh funds from China’s substantial economic stimulus package potentially flow into the cryptocurrency market, or is the enthusiasm about Bitcoin simply unfounded hopefulness?

Table of Contents

Bitcoin to the moon?

Currently, there’s a lot of discussion revolving around the possibility of China’s upcoming $1.4 trillion economic stimulus package. Some analysts predict that this could lead to a resurgence in the cryptocurrency market and cause prices to dramatically increase.

Forbes suggested a potential “shock and awe” intervention that could influence various sectors, such as the cryptocurrency market. However, while the prospect of a large-scale stimulus boosting the cryptocurrency market to unprecedented levels is appealing, the true situation is significantly more intricate.

The connections between China’s economic hurdles, the true intent behind the stimulus package, and its possible effects on cryptocurrencies like Bitcoin (BTC) are complex; however, just because these factors are intertwined doesn’t necessarily imply that a $1.4 trillion influx is imminent for Bitcoin.

Rather than focusing on superficial matters, this initiative aims to tackle fundamental economic problems in China, causing unease among experts and prompting consumers to save more. Let’s delve deeper into the true objectives of this stimulus and investigate potential impacts, if any, on the cryptocurrency market.

The economic reality behind the $1.4 trillion stimulus

Initially, let’s examine the current situation in China. Recently, the economic figures from this global powerhouse haven’t given us much reason for optimism.

Analyst predictions indicate that China’s economic growth in 2024 might stabilize between 4.7% and 4.8%, falling short of the 5% growth target set by the government.

The revisions were made following disappointing retail sales, industrial output, and urban investment figures for August – all of which fell short of what economists had predicted.

Furthermore, China’s unemployment rate in urban areas has reached a six-month high, which explains the urgency of government intervention.

In a conversation with CNBC, Professor Eswar Prasad from Cornell University expressed that China’s economic forecast for the latter part of the year leans significantly towards a warning signal or is almost at the point of being red.

For quite some time now, China’s real estate sector, a key pillar of its economy, has been grappling with a prolonged slump that might require several years to recover from. Although the government has successfully dodged a major financial catastrophe so far, the difficulties persist and are substantial.

According to Duncan Wrigley, the main strategist at Everbright Securities, China’s real estate market is undergoing a gradual, uncomfortable, and prolonged readjustment process. This transformation has noticeably reduced domestic consumption.

In essence, this discussion returns us to the stimulus package. The notion of a $1 trillion liquidity injection isn’t primarily intended to boost the cryptocurrency market. Instead, it is designed as a support system for an economy that is still finding its balance after the COVID-19 pandemic.

Over the past period, policymakers have expressed worry due to China facing slow consumer spending, decreased private investments, and a declining real estate market.

Consequently, it’s essential to realize that this initiative primarily targets rejuvenating the local economy – encouraging consumers to increase spending, boosting investments in infrastructure, and avoiding deflation.

The crypto hype: fact or fiction?

It’s enticing to assume that fresh funds circulating in China’s economy might propel Bitcoin and other cryptocurrencies to unprecedented peaks, given that increased liquidity tends to bolster riskier assets. However, it’s more of a hope than a realistic expectation for the majority of this money to be channeled immediately into cryptocurrencies.

The key is to understand how this stimulus will be used. Most of it will be targeted at domestic recovery, focusing on infrastructure projects, social spending, and tax cuts to get people spending again. 

If the stimulus effectively restores consumer trust and financial security, there may be an uptick in investment risk tolerance. With a sense of economic reassurance, investors might seek out riskier ventures – and digital currencies like crypto could become attractive options for them.

Digital currencies such as Bitcoin tend to flourish in situations where there’s abundant liquidity available, particularly during times when conventional investments like stocks and bonds appear less appealing.

However, these scenarios depend on several conditions. Should the Chinese government successfully implement their stimulus plan, if consumer trust increases, and if investors decide to assume greater risks, there’s a possibility that some of the resulting liquidity might flow into the cryptocurrency market.

However, there’s no guarantee, and it’s certainly not going to be a direct pipeline from China’s stimulus package to Bitcoin.

According to Arthur Hayes, co-founder of BitMEX, it’s possible that China’s economic stimulus might spark the next major cryptocurrency bull market in the future. However, he also notes that this isn’t something we should expect to happen right away; instead, it’s more about a long-term strategy.

Additionally, Justin Sun, the creator of Tron, playfully suggested that China might welcome cryptocurrencies again. However, this is significantly different from an official change in policy.

Currently, the Chinese government’s 2021 prohibition against cryptocurrency trading and mining continues to be enforced. A significant shift in government policy would be necessary for any changes to this ban.

Reddit’s reality check

Despite speculation swirling around China’s potential trillion-dollar investment in Bitcoin, the Reddit community swiftly dismissed such a notion.

A key point raised by users is China’s strict crypto restrictions. Since the 2021 crypto ban, not only is crypto mining illegal, but platforms like WeChat Pay and Alipay are prohibited from handling crypto transactions.

One user pointed out that China doesn’t typically distribute stimulus money directly to consumers. Instead, it focuses on supporting producers to reduce production costs. 

Given that China’s use of cryptocurrencies per person was already less compared to the U.S. and Europe even prior to the ban, it’s extremely improbable that significant volumes will be invested in Bitcoin.

It was pointed out by another user that it’s more probable for any future distribution of stimuli will be similar to the digital yuan rather than Bitcoin, considering the government’s close supervision of the financial infrastructure.

Additionally, numerous users highlighted a down-to-earth explanation for why the stimulus might not convert into cryptocurrency. This is because a significant portion of the populace is encumbered by debts like auto and home mortgages.

Instead of investing any surplus funds in risky assets like Bitcoin, it’s highly probable that such funds would be allocated towards settling existing financial obligations. As for the connection between China’s monetary infusion and Bitcoin price fluctuations, it seems more akin to speculative hope (“hopium”) than a concrete reality.

Where does this leave us?

It’s clear that China’s liquidity stimulus is not a golden ticket for Bitcoin investors. The primary aim of this massive injection is stabilizing China’s economy. 

A tiny fraction of this liquidity could potentially find its way into the cryptocurrency market, but it’s important to note that the crypto sector is not the primary concern of this particular package.

The outcome could significantly hinge on the distribution of these resources by the Chinese administration. As emphasized by Helen Qiao, the chief economist for Greater China at Bank of America, the path to rejuvenating China’s economy revolves around ensuring job stability and income expansion—essential factors that stimulate consumer spending, which is currently in short supply.

As a researcher, I am exploring how addressing certain challenges might spur a wider economic revival in China. This potential resurgence could extend its positive impact across various financial markets, potentially encompassing digital assets like cryptocurrencies as well.

However, uncertainty around China’s crypto environment still looms large. Despite occasional rumors about relaxing its crypto stance, the regulatory framework remains strict. 

2021’s ban on cryptocurrency remains active, allowing only Over-The-Counter (OTC) trades and digital yuan transactions. However, the ownership and trading of cryptocurrencies is significantly limited in this context.

The government’s strategy exhibits a pattern of “cycling between bans and reversals,” which leaves investors and traders in a perpetual state of uncertainty.

In light of all the unknown factors, it’s essential to set realistic goals since the outlook for China’s economy and the worldwide cryptocurrency market is quite volatile and hard to foresee.

Read More

Sorry. No data so far.

2024-09-18 17:03