Crypto market investors seem to look worried about tapering. But what is tapering, and what is the impact on the crypto market?
What Is Tapering
Tapering is a condition in which the central bank reduces the budget to reduce the money supply.
Generally, this tapering occurs during the crisis; the central bank will help the government by encouraging expansive monetary policy.
The central bank carries out a comprehensive monetary policy to increase the money supply to recover the economy.
Conversely, the contracting monetary policy is when the central bank helps reduce the money supply to reduce inflation.
The two most common monetary policies are changing the benchmark interest rate and commercial bank debt transactions.
In an expansive condition, the central bank will generally reduce the benchmark interest rate to encourage loans and purchase bonds or commercial bank debt letters to add funds for bank loans.
Tapering can also refer to the commercial bank debt transaction policy by the central bank that occurs in the comprehensive approach.
The purchase of commercial bank debt securities by the central bank is carried out to increase the amount of money supply.
Time of The Central Bank Doing Tapering
When the central bank feels too much money is already in circulation, but the economy is not ready not to be distributed at all, the central bank does tapering.
This tapering is how the central bank slowly changes the comprehensive policy toward the contract. The central bank’s way of tapering is slowly reducing the purchase of commercial bank debt securities to reduce the additional money supply slowly.
Impact to Crypto
This change is generally made when the central bank feels the economy has begun to recover but is not ready to change thoroughly.
Another condition during this change or tapering is done when inflation has risen quickly and excessively.
Because when the money supply increases, inflation will increase, causing the value of Fiat’s money to fall significantly.
Therefore tapering needs to be done to maintain the stability of Fiat value in the country and maintain the selling power of goods for export purposes. The impact of tapering can make Fiat rise again and make risk assets such as crypto start down again, so it is worried about market participants.
But in reality, tapering does not have a significant effect on influencing Fiat values. The net result will be seen when changes in the benchmark interest rate occur.
So, in general, concerns will be more significant when the central bank changes the benchmark interest rate to rise because it encourages the Fiat value.
Because when the benchmark interest rate rises, the incentive of saving is higher and borrowing money becomes more expensive. So generally money supply is reduced, and the value of Fiat rises.
But this condition will not be seen at the time of tapering, so tapering should not be something that needs to be worried about by Crypto investors.
Concerns must be seen more when the central bank, especially the American central bank, increased the benchmark interest rate.
The Latest American Central Bank Policy News
The US central bank or the Fed will start tapering or have done so and allegedly have the most significant impact on the financial markets because the volume of risk assets transactions such as crypto and the most considerable shares come from the country.
Besides the number of countries that use the US dollar as a foreign exchange reserve, the influence of America is also huge, so it is not surprising that tapering in the country makes many people anxious.
For November 4, 2021, the American Central Bank has just determined the latest benchmark interest rates and tapering plans.
The American central bank will still not change the benchmark interest rate, so the conditions still look safe for risk assets.
But tapering has begun with more frequent frequencies, and the budget will continue to decrease along with this tapering. Remember that the tapering effect is not significant on risk assets.
The current prediction is that the new benchmark interest rate will change in 2022, so there is a possibility that assets will be at risk of experiencing corrections in 2022.
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