The Real Impact of Quantitative Easing on Cryptocurrencies

Source: The Crypto Advisor, Translated by Shaw Jinse Finance

Over the past week, the atmosphere in our internal discussions has subtly shifted. Nothing earth-shattering—no bold predictions, no sweeping conclusions—just a subtle but perceptible change in tone. The Federal Reserve's recent decisions have ignited a cautious excitement. The widely anticipated rate cut, coupled with a moderate Treasury bond-buying program, is enough to get everyone actively involved in the discussion again. This isn't because the Fed's policy is aggressive, but because it seems to be the first clear signal of some kind of shift.

The effects of a shift in monetary policy rarely appear immediately on the charts. You'll first hear it: slight fluctuations in funding markets, a slight decrease in market volatility, and a slight reduction in risk tolerance. Liquidity doesn't happen overnight; it circulates quietly within the system, first changing market behavior before affecting prices.

This dynamic affects all asset classes, but its impact is particularly pronounced in marginal areas—areas with weaker valuation anchoring, longer durations, and greater sensitivity to the cost of capital. Cryptocurrencies fall precisely in this category. The prevailing view is simple: **loose monetary policy is beneficial for cryptocurrencies.** Interest rate cuts, balance sheet expansion, and declining yields push investors to the far end of the risk curve, and cryptocurrencies have historically been at the very far end of the risk curve. This logic is intuitive, widely accepted, and reinforced by memories of extreme periods like 2020. However, intuition is not evidence. Cryptocurrencies exist only in a few liquidity environments, and environments similar to sustained quantitative easing are even rarer. Our understanding of the relationship between cryptocurrencies and quantitative easing largely stems from inferences drawn from specific periods rather than from deep historical experience. Before viewing this shift as a clear signal, let's slow down and ask a more rigorous question: What exactly is the data telling us? Equally important, where does it stop? To answer this question, we need to review every meaningful period of liquidity expansion since the birth of cryptocurrencies, distinguishing between expectations and mechanisms, and between narratives and observable behavior. If we are to discuss whether "quantitative easing (QE) is beneficial to cryptocurrencies," we must first acknowledge a disturbing fact: the entire history of cryptocurrencies has been within environments of very limited liquidity, and only a portion of it conforms to the traditional definition of quantitative easing after 2008. A clear measure is to use the Federal Reserve's balance sheet (WALCL in FRED), which to some extent reflects systemic liquidity and the direction of policy implementation. Let's review the history.

1) The First Round of QE (2009-2010): Cryptocurrencies Didn't Really Exist (in the Market) at That Time

The first round of quantitative easing began in March 2009 and lasted for about a year, characterized by large-scale purchases of mortgage-backed securities (MBS), agency bonds, and long-term Treasury bonds.

Bitcoin was born in 2009, but at that time there was no meaningful market structure, liquidity, or institutional participation to study. This is crucial: the “first” round of quantitative easing that shaped modern markets was, in effect, prehistoric for tradable cryptocurrencies.

2) Second Round of QE and Early Post-Crisis Easing (2010-2012): Cryptocurrencies Existed, But on a Very Small Scale

When the Federal Reserve entered the next phase of post-crisis easing, Bitcoin had already begun trading—but it was still a small-scale, retail-dominated experiment. During this period, any “relationship” between liquidity and cryptocurrency prices was heavily influenced by factors such as the widespread adoption effect (market going from zero to something), the maturing of exchange infrastructure, and pure discovery volatility. Therefore, this cannot be regarded as a clear macroeconomic signal.

3) Third Round of QE (2012-2014): First Comparable Overlap, But Still Noise

This was the first time that “continuous balance sheet expansion” could be compared with the actual active cryptocurrency market.

The problem is that the sample size is still very small and is mainly affected by cryptocurrency-specific events (exchange collapses, custody risks, market microstructure, regulatory shocks). In other words, even if quantitative easing policies overlap with the cryptocurrency market, the signal-to-noise ratio is very low. 4) Long-Term Stability and Normalization (2014-2019): Cryptocurrencies Growing in a World Where Quantitative Easing Doesn't Happen Every Day This is the forgotten part. For a long period after the third round of quantitative easing, the Federal Reserve's balance sheet remained generally stable before the Fed attempted to reduce its size. During this period, cryptocurrencies still experienced significant cyclical fluctuations—a warning against simply assuming "printing money equals cryptocurrency price increases." Liquidity is important, but it is not the only driving factor. 5) The COVID-19 Relief Period (2020-2022): This is the most important data point, and also the most dangerous point of overfitting. This period is memorable because it most clearly and loudly demonstrated the phenomenon of "abundant liquidity, but nowhere to find yields," to which the cryptocurrency market reacted dramatically. However, it was also a unique period defined by emergency policies, fiscal shocks, stimulus checks, behavioral shifts triggered by lockdowns, and a global risk reset—not a typical pattern. (In other words: it proves the existence of this phenomenon, not a universal rule.) 6) Quantitative Tightening (2022-2025) and the Return of “Technical” Bond Purchases (End of 2025): The Situation Becomes More Complex Than Simplified The Federal Reserve began reducing its balance sheet through quantitative tightening (QT) in 2022, and then stopped QT earlier than many expected, with policymakers expressing support for ending the QT process. Just last week, the Federal Reserve announced that it would purchase approximately $40 billion in short-term Treasury bonds starting December 12—explicitly describing it as a reserve management/money market stabilization operation, not a new round of stimulus measures. This distinction is crucial to how we interpret the reaction of cryptocurrencies: the market typically trades the direction and marginal changes in liquidity conditions, not the labels we assign to them. The conclusion so far is that since cryptocurrencies became a true market, we have only had a few relatively “clean” liquidity environments to study—and the most influential one (2020) was also the most unusual. But this doesn’t mean that the claim of quantitative easing is wrong. Rather, it is probabilistic: loose financial environments tend to favor long-term, high-beta assets, and cryptocurrencies are often the purest manifestation of this phenomenon. However, when we delve into the data, we need to distinguish between four factors: (1) balance sheet expansion, (2) interest rate cuts, (3) the dollar’s ​​performance, and (4) risk sentiment—because they don’t always change in sync. First, it’s important to understand that markets rarely wait for liquidity to arrive. They often start trading policy direction long before the policy mechanisms are reflected in the data. This is especially true for cryptocurrencies, which tend to react to expectations—such as shifts in policy tone, signals from balance sheet policy, and anticipated changes in the path of interest rates—rather than to the slow, gradual impact of actual asset purchases. This is why cryptocurrency price movements often precede declining yields, a weaker dollar, and even any substantial expansion of the Federal Reserve's balance sheet. Understanding the meaning of "quantitative easing" is crucial. Easing policies are not a single variable, and their various forms have different effects. Interest rate cuts, reserve management, balance sheet expansion, and broader financial conditions often follow different timelines and sometimes even move in different directions. Historically, cryptocurrencies have been most stable in reacting to declining real yields and easing financial conditions, rather than simply to bond purchases themselves. Viewing quantitative easing as a simple on/off switch oversimplifies a far more complex system. This nuance is important because the data we have supports a directional relationship, not a deterministic one. A looser financial environment increases the probability of positive returns for long-term high-beta assets like cryptocurrencies, but it doesn't guarantee the timing or magnitude of those returns. **In the short term, cryptocurrency prices remain influenced by market sentiment and position volatility; their movements depend not only on macroeconomic policies but also on position size and leverage.** Liquidity certainly helps, but it doesn't override all other influencing factors. Finally, this cycle is fundamentally different from 2020. There were no emergency easing policies, no fiscal shocks, and no sudden plunges in yields. What we're seeing is a marginal normalization—a slight easing of the systemic environment after a prolonged period of tightening. For cryptocurrencies, this doesn't mean prices will immediately surge, but rather that market conditions are changing. When liquidity no longer acts as a drag, assets at the far end of the risk curve don't need to make dramatic moves—they often perform well simply because market conditions eventually allow it.