Don’t count on China’s trillion-dollar stimulus to rescue Bitcoin

Could new liquidity from China’s massive stimulus package spill over into the cryptocurrency market, or is the excitement around Bitcoin just misplaced optimism?

Is Bitcoin going to the moon?

There has been a lot of talk lately about China’s potential $1.4 trillion stimulus package, with some reports suggesting that it could spark a new crypto boom and send prices skyrocketing.

Forbes, in particular, hinted at a “shock and awe” injection that could have far-reaching effects, including on the crypto market. While the idea of ​​this massive stimulus pushing the crypto market to new heights sounds appealing, the reality is much more complex.

China’s economic challenges, the real purpose of the stimulus, and its potential impact on cryptocurrencies are all interconnected, but that doesn’t mean $1.4 trillion will flow into Bitcoin (BTC).

Instead, it aims to address deep-rooted economic issues in China that experts are worried about and consumers are tightening their belts. Let’s take a closer look at what this stimulus is actually aimed at, and then examine how it could impact the cryptocurrency market.

The economic reality behind the $1.4 trillion stimulus

Let’s look at what’s happening in China first. Over the past few months, economic data from the world’s second-largest economy has not been encouraging.

According to analysts, China’s GDP growth in 2024 is expected to hover around 4.7-4.8 percent, below the government’s 5 percent target.

The revision was made after weak August retail sales, industrial production and urban investment data fell short of economists’ expectations.

China’s urban unemployment rate has also risen to its highest level in six months, and we can understand why the government felt the need to act quickly.

China’s economic outlook for the second half of the year is “in or close to the red,” Cornell University Professor Eswar Prasad told CNBC.

The property market, long a cornerstone of China’s economy, has long been in a downturn that could take years to fix. The government has managed to avoid a full-scale financial crisis, but the challenges remain daunting.

China’s housing market is going through a “slow, painful, grueling adjustment process” that is having a serious negative impact on domestic demand, Duncan Wrigley, chief strategist at Everbright Securities, told CNBC.

Now, that brings us back to stimulus. The idea of ​​a trillion-dollar liquidity injection is not intended to inflate the crypto market. Rather, it is designed to support an economy struggling to recover from the COVID-19 pandemic.

China is grappling with issues such as weak consumer demand, weak private investment and a falling housing market, all of which are causing concern among policymakers.

Therefore, it is critical to understand that this stimulus aims to stimulate the local economy, get people to spend more, invest in infrastructure and prevent deflation.

Crypto craze: fact or fiction?

It’s tempting to think that the new money flowing through China’s economy could push Bitcoin and other crypto assets to new heights. After all, when liquidity floods the market, riskier assets typically see a boost. But it’s unrealistic to expect all or most of that cash to flow directly into crypto.

The key is to understand how to use this stimulus. Much of it will be geared toward domestic recovery, focusing on infrastructure projects, social spending and tax cuts to get people spending again.

If the stimulus is successful in boosting consumer confidence and economic stability, risk appetite could increase. Investors who feel more comfortable with the state of the economy may start looking for riskier investments, and that’s where cryptocurrency comes in.

Bitcoin and other digital assets often thrive in environments of excess liquidity, particularly when traditional assets like stocks or bonds appear less attractive.

But that depends on a lot of “ifs.” If the Chinese government effectively implements stimulus, consumer confidence increases, and investors are willing to take more risk, we could see some of that liquidity seep into the cryptocurrency market.

But there is no guarantee of that, and there will certainly be no direct link from China’s stimulus package to Bitcoin.

As BitMEX co-founder Arthur Hayes noted in a blog post , there is hope that China’s fiscal stimulus could indirectly fuel the next big crypto bull market, but even he acknowledges that this is very much a long-term game and the effects won’t be immediate.

Tron founder Justin Sun also recently joked that China would reopen its doors to cryptocurrencies, but this is far from a definitive policy change.

China 🇨🇳 is lifting its crypto ban. What’s the best meme for this?

— HE Justin Sun🌞(recruiting) (@justinsuntron) August 18, 2024

For now, China’s 2021 ban on cryptocurrency trading and mining remains in effect, and any changes in this area would require a major shift in government policy.

Reddit’s reality check

While rumors that China would inject $1 trillion in liquidity into Bitcoin caused a stir, the Reddit community was immediately cool to the idea.

A major point brought up by users is China’s strict crypto restrictions. Since the 2021 crypto ban, not only is crypto mining illegal, but platforms like WeChat Pay and Alipay are also banned from handling crypto transactions.

One user noted that China typically does not distribute stimulus money directly to consumers, instead focusing on supporting manufacturers to lower production costs.

Add to this the fact that even before the ban, per capita cryptocurrency use in China was lower than in the US or Europe, and it seems unlikely that large amounts of money will flow into Bitcoin.

Another user emphasized that given the government’s tight control over the financial system, the stimulus distribution will most likely take the form of digital yuan, not Bitcoin.

Moreover, many users pointed out a more practical reason why the incentive would not be reflected in cryptocurrencies: A large portion of the population is struggling with debts such as car and mortgage loans.

Any extra funds will likely be used to pay down these liabilities rather than invest in speculative assets. In short, the idea that China’s liquidity injection will directly impact Bitcoin prices is more “hope” than reality.

So where does this leave us?

It is clear that China’s liquidity stimulus is not a golden ticket for Bitcoin investors. The primary purpose of this massive injection is to stabilize the Chinese economy.

While a tiny fraction of this liquidity has seeped into the cryptocurrency market, cryptocurrency is far from the main focus of this package.

Much will depend on how the Chinese government allocates these funds. As Helen Qiao, chief economist for Greater China at Bank of America, emphasized, the key to reviving the Chinese economy lies in job security and income growth—critical drivers of consumer spending that are currently lacking.

If China can resolve these issues, it could lead to a broader economic recovery, which could benefit many asset classes, including cryptocurrencies.

But uncertainty surrounding China’s crypto landscape remains high, with the regulatory framework remaining strict despite occasional rumors of loosening its crypto stance.

The 2021 crypto ban is still in effect, and while OTC trading and digital yuan transactions are available, crypto ownership and trading remain severely restricted.

The government’s approach can be described as a “ban/unban cycle” that keeps investors and traders on their toes.

Given these uncertainties, it is crucial to manage expectations as the future of both the Chinese economy and the global cryptocurrency market is highly unpredictable.