Fed may buy equity ETFs to backstop $75T market, boosting crypto

The Federal Reserve may buy equity ETFs to support the $75 trillion stock market in a downturn, boosting liquidity for crypto, analysts said.

"Once the Fed steps in, rate cuts, balance-sheet expansion, even targeted ETF purchases, crypto has historically entered a medium-to-long-term uptrend, similar to what we saw in 2021, as risk appetite returns and capital rotates back into high-beta assets," Alvin Kan, chief operating officer at Bitget Wallet, said.

The US equity market has grown 68% over the past five years to $75 trillion, adding roughly $6 trillion in market value this year alone. Bloomberg Intelligence analyst Eric Balchunas said the Fed could "break decades of precedent" and buy equity ETFs during the next major correction, noting that 58% of Americans own stocks, creating powerful political pressure to prevent a prolonged bear market. The Fed previously bought $8.7 billion in corporate bond ETFs during the COVID-19 pandemic in 2020, acting as a buyer of last resort to restore liquidity to frozen credit markets.

While crypto would not receive direct central bank backing, HashKey Group senior researcher Tim Sun said its macro pricing remains tied to US dollar liquidity, real interest rates and equity market risk sentiment. "Once market participants are convinced that a policy floor effectively underpins risk assets, the risk premium demanded for highly volatile assets will compress," Sun said, adding that Bitcoin and mainstream crypto assets stand to benefit from improving liquidity expectations and a broader revival in risk appetite.

Central banks in China and Japan already use indirect equity ETF purchases via authorized intermediaries with public funds to boost liquidity, Balchunas noted, suggesting America could follow. "This is just one byproduct of the 'Nothing Stops This Train' monetary supply explosion and debt extravaganza sweeping the world, but especially in the US, which at this point feels irreversible," he said.

Crypto's Link to Dollar Liquidity

HashKey's Sun said a prolonged, severe bear market would shock consumer spending, compromise pension stability, stall corporate credit expansion and dent tax revenues. Bitcoin has underperformed US stock markets this year, according to Google Finance data, but a Fed backstop could shift that dynamic.

"This structural backstop supports a more resilient macro backdrop, and that's ultimately bullish for crypto's role as a growth and diversification asset in a world of expanding global liquidity," Kan said.

Jeff Mei, operating chief at BTSE, told Cointelegraph that it is "difficult to see the Fed printing more money to stimulate it, given that inflation is still high. However, there are other tools they can deploy to take action."

This article is for informational purposes only and does not constitute investment advice.