A reduction in the balance sheet might undermine bitcoin’s appeal as an inflation hedge.
Bitcoin tumbled to its lowest price in a month as minutes from the Federal Reserve’s last meeting in December showed officials discussed whether to start shrinking the U.S. central bank’s swollen $8.3 trillion balance sheet.
Prices for the cryptocurrency rallied in recent years as a growing number of investors bet that more than $4 trillion of money printing by the Fed to support the coronavirus-racked economy and markets would spur faster inflation – and that bitcoin could serve as a hedge against rising prices.
So a move to shrink the balance sheet might put downward pressure on bitcoin.
“Some participants judged that a significant amount of balance sheet shrinkage could be appropriate over the normalization process, especially in light of abundant liquidity in money markets,” according to the minutes from the Fed’s Dec. 14-15 meeting, published Wednesday at 2 p.m. ET (19:00 UTC).
The price of bitcoin (BTC) slid 3.3% on Wednesday, at one point dropping to $43,678, the lowest since Dec. 4.
The original cryptocurrency gained about 60% in 2021 but is down almost 5% so far this year.