Definitions

• Quantitative Easing (QE)
  Quantitative Easing is an expansionary monetary policy designed to stimulate economic growth during economic weakness or recession. Central banks, such as the Federal Reserve or the European Central Bank, may implement QE. The primary goal is to increase liquidity, encourage borrowing and investment, and ultimately support economic growth.

• Quantitative Tightening (QT)
  Quantitative Tightening is a contractionary monetary policy typically used to curb inflation or prevent an overheated economy. When the economy grows too quickly, inflation rises, or markets become overly loose, central banks employ QT to reduce liquidity, preventing overheating and averting asset bubbles.

Key Methods

• Quantitative Easing (QE)
  Purchasing Financial Assets: Central banks inject funds into the financial system by purchasing government bonds, corporate bonds, or other assets, boosting bank reserves and improving liquidity.
  Lowering Interest Rates: As the central bank buys bonds, bond prices rise, yields fall, and long-term market interest rates decrease, encouraging low-cost borrowing for individuals and businesses, thus promoting consumption and investment.
  Currency Depreciation: QE may cause currency depreciation by increasing the money supply, making domestic currency cheaper for foreign investors, which can boost exports.

• Quantitative Tightening (QT)
  Selling or Ceasing Asset Purchases: The central bank can sell government bonds or other assets, withdrawing funds and reducing market liquidity. Alternatively, it may allow bonds to mature without reinvestment.
  Raising Interest Rates: Reducing the money supply can increase market interest rates, raising borrowing costs, restraining economic activity and excessive consumption.

Policy Goals

• Quantitative Easing (QE)
  Lower Borrowing Costs: By reducing interest rates, QE encourages businesses and individuals to borrow and spend.
  Stimulate Economic Growth: Increased liquidity boosts consumption and investment, driving economic recovery.
  Prevent Deflation: During downturns, QE helps prevent deflation or falling prices.

• Quantitative Tightening (QT)
  Control Inflation: By reducing liquidity, QT helps control inflation and stabilize prices.
  Prevent Economic Overheating: QT limits excessive consumption and investment, preventing risks associated with rapid growth.
  Reduce Asset Bubble Risks: QT mitigates excessive asset price growth caused by overly loose policies.

Potential Risks

Quantitative Easing (QE): Excessive increases in money supply may lead to significant price increases and inflation. Too much money might flow into stock or real estate markets, raising asset prices and forming bubbles.

Quantitative Tightening (QT): QT may lead to higher borrowing costs, restraining corporate investment and consumer spending, potentially slowing economic growth, or even causing a recession. Rapid or large-scale QT could trigger financial market fluctuations, leading to declines in stock, bond, or other asset prices.

Historical Applications

Historical Instances of Quantitative Easing (QE)

1) Japan (Bank of Japan)
Starting in the early 2000s, Japan adopted quantitative easing to combat deflation and stimulate economic growth. The Bank of Japan’s aggressive asset purchase program aimed to increase the money supply and encourage inflation, pioneering QE as a monetary policy tool.

2) United States (Federal Reserve)
To address the 2008 financial crisis, the Federal Reserve implemented quantitative easing, purchasing large amounts of government securities and mortgage-backed securities to lower interest rates and increase liquidity in the financial system. The QE program continued in various forms to support the economy during slow growth and the COVID-19 pandemic.

3) United Kingdom (Bank of England)
The Bank of England launched a QE program in 2009 to mitigate the effects of the global financial crisis. Purchasing government bonds and other securities aimed to lower borrowing costs and stimulate investment and consumption.

4) Eurozone (European Central Bank)
The European Central Bank (ECB) launched a QE program in 2015 to combat deflation and promote economic recovery in the Eurozone. The ECB’s asset purchases included government bonds, corporate sector securities, and asset-backed securities.

5) Canada (Bank of Canada)
In March 2020, the Bank of Canada adopted quantitative easing for the first time to counter the economic impact of the COVID-19 pandemic. The program aimed to support financial market functioning and provide liquidity to the Canadian economy.

6) Australia (Reserve Bank of Australia)
In November 2020, the Reserve Bank of Australia implemented QE to lower interest rates along the yield curve by purchasing government bonds and supporting the Australian economy during the pandemic.

Historical Instances of Quantitative Tightening (QT)

1) United States (Federal Reserve)

First QT: 2017-2019
After the 2008 global financial crisis, the Federal Reserve accumulated massive assets through multiple rounds of QE, expanding its balance sheet to $4.5 trillion. With the U.S. economy recovering, the Federal Reserve gradually exited loose policies to prevent overheating, starting QT in October 2017 by gradually reducing reinvestment of maturing assets, initially cutting $10 billion monthly and later increasing to $50 billion. QT ended in July 2019 due to market fluctuations and economic growth pressure, prompting a return to accommodative policy.

Second QT: 2022-present
During the 2020 COVID-19 pandemic, the Fed implemented large-scale QE, expanding the balance sheet to around $9 trillion. In 2022, amid high inflation, the Fed shifted to a tightening policy. Beginning in June 2022, QT reduced the balance sheet by $47.5 billion monthly, planning to gradually increase to $95 billion, including stopping reinvestments in maturing government bonds and mortgage-backed securities (MBS).

2) United Kingdom (Bank of England)

First QT: 2022-present
In February 2022, the Bank of England announced it would cease reinvesting in maturing bonds, reducing its balance sheet. Additionally, the Bank planned to sell part of its bond holdings actively to reduce liquidity. During implementation, UK QT faced market turmoil, especially in September 2022 when the government’s tax cut plan triggered market fluctuations, prompting the Bank of England to temporarily suspend some QT measures to stabilize the gilt market.

3) Japan (Bank of Japan)

One of the earliest central banks to implement QE in 2001 to tackle long-term deflation. By 2006, with signs of economic recovery, the Bank of Japan gradually exited unconventional easing policies by reducing the supply of base money and withdrawing liquidity from the financial system.

4) Eurozone (European Central Bank)

The ECB launched large-scale QE in 2015, purchasing government bonds and other financial assets from Eurozone countries. In 2018, with economic recovery and rising inflation, the ECB decided to end asset purchases and stop reinvesting in maturing bonds. However, the ECB’s tightening was less aggressive than the Fed’s, mainly stopping asset expansion rather than actively selling assets.

Impact on the Market

Quantitative Easing (QE)

1) Cryptocurrency Market
Similar to stocks, cryptocurrencies are considered risk assets. As market liquidity increases, investors’ risk appetite grows, making the cryptocurrency market more attractive.

BTC has experienced two main periods of QE: September 2012 to October 2014, aimed at economic recovery, and March 2020 to March 2022, in response to the labor market during the COVID-19 pandemic.

BTC Trends During QE from September 2012 to October 2014

During this QE phase, BTC’s price surged from $10 to over $300, a rise of over 3000%. However, BTC was in its early stages, with low market value, so policy changes minimally influenced price fluctuations. Most volatility came from the supply-demand dynamics among a limited number of participants, making this phase less relevant as a reference.

BTC Trends During QE from March 2020 to March 2022

By this stage, BTC had reached a certain scale. Nearly concurrent with the start of QE, BTC’s price surged, climbing from around $6,000 to $68,000 before falling back to $45,000. BTC hit a peak in November 2012, around the time the Federal Reserve signaled a shift in market control during the November FOMC meeting, anticipating future policy changes. This phase demonstrates a strong positive correlation between BTC’s trend and QE.

2) Bond Market
When central banks increase bond purchases, demand for bonds rises, indirectly increasing bond prices and decreasing yields. With lower yields, investors seeking higher returns may shift from bonds to riskier assets.

3) Stock Market
QE leads to lower interest rates, increased corporate profits, and rising stock prices. As market liquidity grows, investors’ risk tolerance also rises, increasing investments in stocks and other risk assets.

Quantitative Tightening (QT)

1) Cryptocurrency Market
Similarly, cryptocurrencies are risk assets, and when there is more “money” in the market, funds tend to flow into these risk assets.

BTC has gone through two primary QT phases: from October 2017 to August 2019, to stabilize the economy, and from June 2022 to the present, to curb inflation following the QE of the COVID-19 period.

BTC Trends During QT from October 2017 to August 2019

Despite the Fed’s adoption of QT from October 2017 to August 2019, BTC initially rose to a peak before retreating, eventually seeing a total gain of around 120%.

This diverged from theoretical expectations, possibly due to the Fed’s steady rate hikes from 2015 to 2018, signaling gradual control. Markets perceived this as supportive for economic stability, and QT had a relatively minor impact on prices.

This case illustrates that market expectations can outweigh conventional and unconventional (QT) monetary policies in complex economic environments.

BTC Trends During QT from June 2022 to the Present

Although the Fed ended rate hikes by late 2023 and began cutting rates in September 2024, QT continues. BTC initially declined as QT began, then started a bull market. QT did not result in a sustained downtrend for BTC. This does not imply QT was ineffective; rather, amid early QT, markets anticipated rate cuts, reducing QT’s impact.

2) Bond Market
In contrast to QE, when central banks reduce government bond purchases, bond demand falls, prices drop, and yields rise. Higher yields attract investors but increase borrowing costs for governments and companies.

3) Stock Market
QT leads to higher interest rates, reduced corporate profits, and falling stock prices. Bonds become more appealing with higher yields, shifting investor preference from stocks to bonds, and putting further pressure on stock prices.

Conclusion

Theoretically, QE injects liquidity, raising risk asset prices and investor risk tolerance, while QT withdraws liquidity, lowering risk asset prices. However, these are only theoretical economic relationships.

In practice, factors like market expectations affect policy outcomes. Thus, like conventional monetary policies, QE and QT, as unconventional tools, may not always achieve their theoretical effects. Market changes should be understood in light of current market sentiment, macroeconomic conditions, and fiscal policy.