Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
On May 11, block 630,000 on the Bitcoin network was mined. The rate at which new bitcoins are produced promptly dropped from 12.5 to 6.25 approximately every 10 minutes. Many people expected this “halving” to trigger a sustained rise in bitcoin’s U.S. dollar price, as it did after previous halvings in 2013 and 2017. And indeed, bitcoin’s price is now trending upwards after an initial sharp fall immediately after the halving. So is there going to be another bitcoin bull run?
The halving has come at a time when the U.S. Federal Reserve is creating unprecedented amounts of new money through “quantitative easing.” For bitcoiners, such profligate fiat money creation only serves to emphasize the soundness of bitcoin, with its built-in scarcity. Echoing the famous message that Satoshi left on Bitcoin’s genesis block, F2Pool, which mined the last block before the halving, etched this on the blockchain: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.” The implication is clear: The Fed’s action is bullish for bitcoin.
See also: Bitcoin Halving, Explained
Highlighting the fact that bitcoin’s production rate has fallen just as the Fed’s production rate is wildly increasing, some people have dubbed the halving “quantitative tightening.” But I’m afraid this is wrong. Halving bitcoin’s production rate isn’t quantitative tightening.
Everyone knows that when the Fed does quantitative easing (QE), it is putting new money into the economy. It buys assets from the private sector, which it pays for with newly created dollars. These new dollars circulate in the economy, stimulating activity and raising inflation.
Quantitative tightening is the reverse. The Fed sells assets to the private sector, or allows assets it already holds to mature. It burns the money it receives in return for these assets. So the quantity of dollars in circulation actually falls, depressing activity and reducing inflation. Quantitative tightening is destruction of money.
As recently as two years ago, the Fed was doing quantitative tightening. It allowed U.S. Treasury bonds on its balance sheet to mature, and burned the money the U.S. government paid it to redeem them. Between 2016 and 2018, the Fed cut base money – the dollars it directly creates – by half. But Bitcoin’s code doesn’t include any mechanism by which the supply of bitcoins can be reduced. Bitcoin can’t burn bitcoins. So it is just wrong to call the halving “quantitative tightening.”
The Fed ended quantitative tightening when…