Fed stock-market backstop could boost crypto

Analysts say cryptocurrencies could gain if the Federal Reserve intervenes to support the roughly $75 trillion U.S. equity market in a deep bear market by providing liquidity or purchasing equity exchange-traded funds.

The U.S. stock market has risen about 68% over the past five years and has added roughly $6 trillion in market value so far this year. About 58% of American households hold stocks, and some analysts note that political pressure to limit a prolonged downturn could influence policymakers.

In 2020 the Fed bought corporate bond ETFs to restore liquidity when credit markets froze during the COVID-19 shock, acquiring about $8.7 billion in ETF assets. Several analysts now say the Fed could depart from past practice in a larger downturn and buy equity ETFs or use other tools to help markets function.

ETF analyst Balchunas expects the Fed to purchase equity ETFs in the next major market downturn and predicted such purchases could become more common. He referenced practices in China and Japan where public funds support equities indirectly through authorized intermediaries.

Investor Peter Schiff warned that years of rapid market gains have increased the risk of a sharp correction. Analysts say a severe bear market could depress consumer spending, strain pension funds, tighten corporate credit and reduce tax revenues.

Alvin Kan, chief operating officer at Bitget Wallet, noted that episodes of policy support and easier liquidity have previously coincided with medium-to-long-term uptrends in crypto, when risk appetite returned and capital rotated into higher-volatility assets.

Tim Sun, senior researcher at HashKey Group, described crypto pricing as linked to U.S. dollar liquidity, real interest rates and equity market risk sentiment. He added that if market participants accept a policy floor under risk assets, the risk premium demanded for volatile assets would narrow and bitcoin and major tokens could benefit from improved liquidity expectations.

Jeff Mei, operating chief at BTSE, said the Fed is unlikely to increase money printing while inflation is elevated but can deploy other tools, including rate cuts, targeted asset purchases or balance-sheet expansion, to restore market liquidity without direct fiscal transfers.

Crypto performance has diverged from U.S. stocks this year. Market participants and analysts differ on both the likelihood of large-scale Fed intervention and on how digital assets would respond if the Fed moved to support equities.