Quantitative easing, more commonly known as QE, is a form of monetary policy conducted by central banks to stimulate a country’s economy by providing liquidity to the banking system. QE is a relatively new concept, first initiated by Japan’s central bank (BOJ) in March 2001. Japan was in the middle of the country’s worst financial crisis since the Great Depression. Consequently, it was in desperate need of an innovative solution to its economic problems. The BOJ unveiled a radically new program that involved purchasing large quantities of government bonds from commercial banks and other financial institutions. This became known as quantitative easing (QE).
Why Do We Need Quantitative Easing?
The main goal of QE is to increase economic activity by aggressively adding reserves to the country’s banking system. As we mentioned, reserves are added to the banking system through the purchase of government securities by central banks. Of course, simply adding reserves to the banking system will not “magically” increase economic activity. The banks play a major role in this process by lending the excess reserves to consumers and businesses. Without cooperation from the banks, QE becomes completely ineffective.
Also, QE contains a bonus of reducing long-term interest rates. By purchasing large quantities of government bonds, central banks decrease the overall supply of these securities, increasing demand along the way. As you know, all debt instruments have two main components — a price and an interest rate. Using the inverse relationship between these components, central banks initiate a decline in long-term rates by implementing their QE program. Of course, this simplifies borrowing funds, which helps to stimulate economic activity.
In response to the 2008 global financial crisis, the majority of G20 central banks released their version of QE. They followed the playbook of the BOJ from 2001. For the past 13 years, all major central banks have been in a continuous loop of quantitative easing. These monetary authorities have substantially increased their balance sheets by purchasing government bonds from banks and other financial institutions. Interest rates have been hovering near 0% since 2008.
Measuring The Success Of QE
Has quantitative easing produced the desired results? Is QE considered a successful central bank monetary program? These are difficult questions to answer because QE has produced varying results for different groups of people. The results have been mixed, at best. Many investors and financial professionals believe that QE has been a raging success while others believe that it will go down in the history books as an abject failure.
Professional Investment Community
In terms of the professional investment community, QE has generated incredible results because it has been the driving force behind the greatest stock market rally of all time. Global equity prices have risen dramatically during the past decade in response to aggressive bond purchasing programs, which have pushed interest rates to 0%. Some countries have experienced negative interest rates. Based on historical data, low-interest rates are very bullish for stocks because it forces investors out of the bond market and into the stock market. This explains why stocks have experienced a record-setting bull market since 2008.
What about individual consumers and the broader global population? Has QE provided any relief to this sector of society? Economic historians and research institutes have concluded that central bank QE has failed to provide any economic benefit to individual consumers. Why has QE been unable to improve the lives of consumers, the working class, self-employed workers, and small business owners? Because the overwhelming majority of funds received by commercial banks through quantitative easing never made their way into the hands of consumers in the form of bank loans.
As we discussed, the original intent of QE was to stimulate economic activity at the consumer level. In theory, quantitative easing is an excellent approach to resurrecting the growth rate of an economy. Unfortunately, QE has one major flaw that is difficult to overcome. The stumbling block occurs when central banks deposit funds with each commercial bank through the purchase of government bonds. Central banks can’t force these institutions to disperse the deposited funds to consumers and small businesses in the form of bank loans. Instead of lending money, commercial banks prefer to hold these excess reserves on their balance sheets. Commercial banks can earn interest on excess reserves. Therefore, it’s much easier and less risky for these institutions to hoard the money received by central banks. This explains why many people consider QE to be a failure.
If QE is unable to provide economic relief to the working-class population, why do central banks continue to promote this program? Because quantitative easing has provided record-setting gains for all G20 stock markets. Generally speaking, central banks believe that rising stock prices are beneficial to the overall economy. The majority of central bankers believe in the trickle-down theory, which states that profits generated from the wealthiest 10% of the population will eventually “trickle-down” to the middle class and lower class. The vast majority of stock market ownership is confined to the upper class (i.e. the wealthiest 10% of the population). Therefore, central bankers believe that they must keep stock markets elevated to maintain the trickle-down theory.
A growing number of professional economists are concerned that central banks are reaching their limit in regard to QE. Central bank balance sheets have reached unprecedented levels. If QE continues at its current pace, central banks will soon own 100% of all outstanding government bonds. If interest rates begin to rise, bond prices would fall and central bank balance sheets would collapse in value. This explains why QE will eventually be phased out of existence. Central banks can’t afford to jeopardize their balance sheets. As much as central banks love quantitative easing, this program can’t last any longer.
Brief Summary Of Quantitative Easing
- QE is a form of monetary policy conducted by central banks.
- The goal of QE is to stimulate a country’s economy.
- QE occurs when central banks provide liquidity to the banking system.
- Liquidity is accomplished when central banks purchase government bonds.
- The bonds are purchased from commercial banks and other financial institutions.
- The proceeds from the sale of the bonds are held by the commercial banks.
- Commercial banks will loan these proceeds to consumers.
- QE was first initiated by Japan’s central bank (BOJ) in March 2001.
- QE contains a bonus of reducing long-term interest rates.
- All G20 nations introduced a QE program following the 2008 financial crisis.
- Most financial experts agree that QE has failed to produce the desired results.
- Central banks prefer QE because it increases stock prices.
- QE adds a great deal of risk to central bank balance sheets.
Everything You Need to Know About Binance USD
Binance USD (BUSD) is a fiat-backed stablecoin designed to address issues of accessibility, flexibility, and speed on the blockchain. A cryptocurrency exchange leader, BUSD, is currently the second-largest stablecoin on the blockchain by market cap.
This flexible cryptocurrency is stable, regulated, and can be swapped on multiple blockchains. Investors can use BUSD on the Ethereum chain, Binance Chain, and Binance Smart Chains.
Binance USD (BUSD) was created to be a safe investment for cryptocurrency investors looking to invest in a low-volatility stake. This cryptocurrency is pegged at the value of the US Dollar. The New York State Department of Financial Services regulates Paxos, the creators of this currency.
USD is a fiat-backed stablecoin backed by Paxos instead of a government. As a result, Paxos holds the equivalent of the total amount of BUSD in US dollars in its financial reserves. BUSD is a stablecoin that keeps pace with the price of the United States dollar.
When the price of the dollar rises or falls, the price of BUSD fluctuates as well. Paxos issues monthly audits to verify collateralization.
1. BUSD is regulated
2. Fiat-backed stablecoin backed by a reserve
3. 1:1 ratio price fluctuates with US Dollar
4. Operates on multiple blockchains
Paxos and Binance created Binance USD.
Binance USD (BUSD) was launched in September 2019 as a partnership between Paxos and Binance.
They first issued BUSD on the Ethereum blockchain as ERC-20 tokens. Binance USD is one of only three cryptocurrency tokens currently approved by Wall Street regulators. The New York-based financial company Paxos issues BUSD tokens.
Paxos collateralize BUSD tokens by holding equivalent dollar amounts in regulated US bank accounts. Paxos is also responsible for creating and burning BUSD tokens.
Paxos and Binance designed BUSD to be a low-volatility investment for crypto traders seeking highly liquid investments. Investors can easily convert their BUSD investment into fiat-backed currency during times of volatility.
Cryptocurrency experts recommend taking security measures like using two-factor authorization (2FA) to manage online Binance USD accounts and wallets. Serious investors use Binance USD wallet software to store, protect, and manage investments. They do this by using public and private keys to store value.
We do not provide investment advice. Cryptocurrency traders looking to invest in Binance USD should do their research on the history and performance of BUSD and choose the best options that fit their investing style and budget.
It’s important for investors to consider how much they can afford to lose on investments with downturns before committing to any investment. The creators of Binance USD designed BUSD as a low-volatility asset for crypto traders seeking high liquidity. This stablecoin’s goal is to remain stable and as close to the value of one dollar as possible. While its performance appears stable, this can change at any time.
What are Candlesticks and How to Read Them
A candlestick is a type of price chart used in technical analysis to forecast the future price direction of stocks, commodities, and cryptocurrencies. Each candlestick is a graphical representation of a price movement for a specific period. Four different price points are displayed on each candlestick. They include open, high, low, and close.
Candlesticks are one of the oldest forms of technical analysis. According to historical records, candlestick charting can be traced back to Japanese rice merchants during the 18th century. Most financial historians agree that Munehisa Homma was responsible for popularizing candlestick charting.
Candlestick formations are based on a strict set of rules which are universally accepted among all traders and investors. Let’s review a few of the most basic candlestick formations and patterns.
A solid red candlestick is displayed if the opening price is above the closing price (Chart #7).
A hollow candlestick is displayed if the closing price is above the opening price (Chart #8).
Bullish Candlestick Patterns
Big White Candle – The market opens near the low and closes near the high (Chart #9).
Doji – The opening and closing price is virtually identical (Chart #10).
Hammer – A candlestick that consists of a small body near the daily high with a long lower tail (Chart #11).
Bearish Candlestick Patterns
Big Red Candle – The market opens near the high and closes near the low (Chart #12).
Inverted Hammer – A red or white candlestick within an upside-down hammer position (Chart #13).
Shooting Star – A red or white candlestick with a small body, a long upper shadow combined with little or no upper tail (Chart #14).
Brief Summary of Candlesticks
- A candlestick is a type of price chart used in technical analysis.
- Each candlestick represents price movement for a specific period of time.
- Four different price points are displayed on each candlestick.
- The price points include open, high, low, and close.
- Candlesticks are one of the oldest forms of technical analysis.
- Candlestick charting was first used by Japanese rice merchants during the 18th century.
- Munehisa Homma was responsible for popularizing candlestick charting.
- Candlestick formations are based on a strict set of rules.
- These rules are universally accepted among all traders and investors.
What Is an IEO?
An Initial Exchange Offering (IEO) is a type of token sale administered by a cryptocurrency exchange. The entire process is controlled and managed by the exchange on behalf of the crypto company. Both parties have a vested interest in the success of the IEO. Neither party receives a payout unless investors purchase the token through the participating exchange. Therefore, it’s not uncommon for the exchange and the token issuer to join forces to help with marketing, promotions, and advertising.
Before launching the IEO, the crypto exchange and token issuer sign an agreement outlining the payout structure. Typically, the token issuing company is required to pay a listing fee along with a percentage of tokens sold through the crypto exchange. The majority of IEO agreements stipulate that the new token must be listed on the exchange for a predetermined amount of time following the initial sale of the token.
Investors who participate in the IEO are required to open an account with the participating crypto exchange. Instead of sending money to the token issuer through a smart contract, the investor deposits funds into his/her crypto account. Funds are dispersed by the crypto exchange to the crypto company.
IEO Versus ICO
As you may recall from our ICO discussion, the first ICO was launched in 2013. However, the ICO explosion did not occur until 2017, followed by its peak in 2018. Without question, the chief complaint within the crypto community concerning ICOs was a large number of failures and outright scams. In fact, the failure rate approached 90% in 2018.
As we have discussed several times, the cryptocurrency community is incredibly innovative. This community is filled with some of the brightest minds in global finance. Not surprisingly, a small group of young men and women were quick to replace problematic ICOs with IEOs in early 2019. The first major crypto exchanges to join the IEO wave occurred in January 2019. IEO activity continues to flourish in 2020.
The main difference between IEO and ICO is the level of success. In a typical ICO, the crypto company received funding immediately upon issuance of the token. Investors had very little recourse once the tokens were dispersed. They were trapped in a vulnerable position. Sadly, many unscrupulous start-up firms basically disappeared upon receipt of the funds commonly known as a ‘rug pull’.
IEOs solve this problem by preventing the token issuer from receiving funds immediately upon the distribution of the tokens. As we discussed earlier, both parties work together to ensure the success of the project, which increases the likelihood of a rising token price.
Although IEOs have only been in existence for two years, the popularity of this new fund-raising method has increased substantially. The success rate of projects launched on IEO is much higher compared to ICOs. Most likely, this trend will continue.
IEO Regulatory Environment
As you may recall from our ICO discussion, crypto companies struggled to clear all of the regulatory hurdles to satisfy financial regulators. Unfortunately, IEO participants, are experiencing the same type of regulatory problems that plagued the ICO marketplace. This by and large means that regulators dissuade people from taking part in IEOs.
A positive to this is that IEOs are largely unregulated and don’t have to satisfy bureaucracy that can stifle innovative projects.
Financial regulators, particularly in the United States, claim that an initial exchange offering is similar to an initial coin offering, even though the token issuer is not directly involved in the sale of the token. An ongoing problem with regulation is whether or not any particular token counts as security and needs regulation, or whether they are utility tokens. Exchanges will typically avoid listing securities on an IEO as it means they have to submit to regulation.
To avoid the strict regulation requirements around securities, crypto exchanges may even opt not to offer tokens in countries like the United States where there is ambiguity about regulation. As long as the IEO is not soliciting in a particular country, registration is not required.
Due to the overwhelming success of IEOs, many of the world’s largest crypto exchanges are becoming heavily involved in IEOs by offering tokens on behalf of start-up companies. Most likely, this trend will continue.
Brief Summary of IEO
- An initial Exchange Offering is a token sale administered by a crypto exchange.
- The entire process is overseen by the crypto exchange.
- Neither party receives a payout unless investors purchase the token.
- The exchange and token issuer will often collaborate with marketing and advertising.
- Both parties sign an agreement outlining the payout structure of the IEO.
- The new token will be listed on the exchange for a predetermined time period.
- Participating IEO investors are required to open an account with the exchange.
- Investors pay for the token by depositing funds into their crypto account.
- IEOs have proven to be safer than ICOs.
- Many crypto exchanges are not participating in heavily regulated countries.
- IEOs have become very popular in the crypto universe.
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