Most governments have been giving their citizens, institutions and others large amounts of stimulus money. For example, the USA provided a large stimulus package. This money comes by two means 1) New amounts of money issued by the Federal reserve and printed by the Mint, and, 2) money borrowed from investors from around the world who purchase US Treasury bonds which have been rated as AAA due to their ability to guarantee returns to users. With both (1) and (2) there is a sudden influx of money – about 2 trillion dollars from treasury bonds and about 600 billion dollars in newly printed money in circulation. This provides liquidity to institutions who need it, citizens who are in dire need, etc and comes as a succor. Such such large amounts of money suddenly gets into the economy – in the short term causes much needed relief to individuals needing them. The following link shows where this money comes from.
Based on this -logic – what would happen to the value of cryptocurrencies, that are in such short supply (rather constant supply)?
For example, Bitcoin before the global pandemic was trading at around 8000$. Now suddenly the true value of the fiat currency has dropped by some percentage points – owing to the sudden stimulus package by means of printing and borrowing money.
For the sake of ease of understanding I define 2 terms. Pre-stimulus dollar value (PDV) and post-stimulus dollar value(ODV). The pre-stimulus dollar value can be thought of as the amount of goods 1$ can buy you, before the stimulus package was rolled out into the economy. The post-stimulus dollar value can be thought off as the amount of goods 1$ can buy you, after the stimulus package money is rolled out into the economy. This event of rolling out the stimulus package into the economy in terms of grants, money transfers, aids to essential businesses, and institutions will take anywhere between 3 and 6 months time. The idea here is that the ratio of pre-stimulus dollar value to post-stimulus dollar value is greater than 1, because suddenly we have money created through printing, and borrowing and not actual economic activity as in production of goods and services. I call this ratio the
Stimulus dollar value ratio (SDVR) = Pre-stimulus dollar value(PDV)/Post-stimulus dollar value(ODV)
During normal inflation adjusted times, this ratio is usually 1.05 for a normal inflation adjusted dollar when inflation is 5% over a 1 year time horizon. However, now the stimulus money could increase this ratios from about 1.05 to anywhere between 1.1 and 2.0. In the below figure using a graph that calculates varying SDVRs, I calculate the true value of the BTC in terms of the post-stimulus dollar value. I assume a constant BTC price of 8000$ prior to the stimulus package being rolled out. This combined with BTC halving and India’s opening up of the crypto-economy allowing citizens to convert fiat to Crypto should potentially increase demand for cryptocurrency overall, as a digital store of value. It is yet to be seen when value will rise in markets to reflect the SDVR’s true impact on price. It is important to note that prior to BTC dropping from 20000$ to 6000$ India allowed cryptocurrency trading and 11% of the world’s cryptocurrencies were owned by Indian cryptocurrency holders according to some estimates.