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

Could a flood of new liquidity from China’s massive stimulus spill into the crypto market, or is the excitement surrounding Bitcoin just misplaced optimism?

Bitcoin to the moon?

Lately, there’s been a lot of chatter about China’s potential $1.4 trillion stimulus, with some reports suggesting it could ignite a new crypto boom and send prices soaring. 

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

China’s economic challenges, the actual purpose of the stimulus, and its potential impact on crypto are all interconnected — but that doesn’t mean $1.4 trillion is about to flood into Bitcoin (BTC).

Instead, it aims to address deep-rooted economic issues in China, which has experts concerned and consumers tightening their belts. Let’s take a closer look at what this stimulus is really targeting and then explore how if at all, it could influence the crypto market.

The economic reality behind the $1.4 trillion stimulus

First, let’s look at what’s happening in China. Over the past few months, economic data coming out of the world’s second-largest economy hasn’t exactly been encouraging. 

According to analysts, China’s GDP growth for 2024 is now expected to hover around 4.7% to 4.8%, which is below the government’s 5% target. 

This revision came on the back of weak retail sales, industrial production, and urban investment data for August — none of which met economists’ expectations. 

Additionally, China’s urban jobless rate has climbed to its highest level in six months, and you can see why the government feels the need to act swiftly.

Professor Eswar Prasad from Cornell University pointed out in an interview with CNBC that China’s economic outlook for the second half of the year is ‘flashing red, or pretty close to red.’ 

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

Duncan Wrigley, chief strategist at Everbright Securities, told CNBC that China’s housing market is going through a ‘slow, painful, grinding adjustment’—an adjustment that has put a serious damper on domestic demand.

Now, this brings us back to the stimulus. The idea of a trillion-dollar liquidity injection isn’t necessarily aimed at inflating the crypto market. Rather, it’s designed to shore up an economy that’s struggling to regain its footing after the COVID-19 pandemic. 

China has been dealing with sluggish consumer demand, weak private investment, and a falling housing market, all of which have caused concern among policymakers. 

Hence, it’s critical to understand that this stimulus is aimed at reviving the domestic economy — getting people to spend more, investing in infrastructure, and preventing deflation. 

The crypto hype: fact or fiction?

It’s tempting to think that new money sloshing around in China’s economy could push Bitcoin and other crypto assets to new highs. After all, when liquidity floods the market, riskier assets often see a boost. But expecting all or most of this cash to flow directly into crypto is wishful thinking.

The key is to understand how this stimulus will be used. Most of it will be targeted at domestic recovery, focusing on infrastructure projects, social spending, and tax cuts to get people spending again. 

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

Bitcoin and other digital assets often thrive in environments where there’s excess liquidity, especially when traditional assets like stocks or bonds seem less attractive.

But this hinges on many “ifs.” If the Chinese government rolls out the stimulus effectively, if consumer confidence rises, and if investors are willing to take on more risk, then we could see some of that liquidity trickle into the crypto market. 

However, there’s no guarantee, and it’s certainly not going to be a direct pipeline from China’s stimulus package to Bitcoin.

As Arthur Hayes, co-founder of BitMEX, pointed out in his 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 more of a long-term play, and the effects won’t be immediate.

Moreover, Justin Sun, founder of Tron, recently joked that China will reopen its doors to crypto, but that’s a far cry from a confirmed policy shift.

For now, China’s 2021 ban on crypto trading and mining remains in place, and any change on that front would require a major reversal in government policy.

Reddit’s reality check

While excitement buzzed about China’s rumored trillion liquidity injection into Bitcoin, the Reddit community quickly poured cold water on the idea. 

A key point raised 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 prohibited from handling crypto transactions.

One user pointed out that China doesn’t typically distribute stimulus money directly to consumers. Instead, it focuses on supporting producers to reduce production costs. 

This, coupled with the fact that even before the ban, China’s crypto adoption per capita was lower than in the U.S. or Europe, makes it highly unlikely that large amounts would flow into Bitcoin.

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

On top of that, many users pointed out a more practical reason why the stimulus wouldn’t end up in crypto: much of the population is burdened with debt, such as car and mortgage loans. 

Any extra funds would likely be used to pay off those obligations rather than invested in speculative assets. In short, the idea that China’s liquidity injection will directly impact Bitcoin prices is more “hopium” than reality.

Where does this leave us?

It’s clear that China’s liquidity stimulus is not a golden ticket for Bitcoin investors. The primary aim of this massive injection is stabilizing China’s economy. 

While a very small proportion of this liquidity might trickle into the crypto market, crypto is far from the main focus of this package.

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

If China can address these issues, it may lead to a broader economic recovery, which could eventually benefit multiple asset classes, including crypto.

However, uncertainty around China’s crypto environment still looms large. Despite occasional rumors about relaxing its crypto stance, the regulatory framework remains strict. 

The 2021 crypto ban is still in place, and while OTC trades and digital yuan transactions exist, crypto ownership and trading are heavily restricted. 

The government’s approach can be described as a “ban/unban cycle,” keeping investors and traders constantly on edge.

Given these uncertainties, it’s crucial to manage expectations, as the future of both China’s economy and the global crypto market remains highly unpredictable.