How does government policy affect cryptocurrency prices?

Introduction: Fiscal Policy and Investors’ Pockets

Why should crypto traders pay attention to this topic? Because fiscal policy is not just an economic theory — it’s about the money that goes into people’s pockets or is taken out of them. And where the money is, there are investments, including digital assets.

When governments change taxes and spending, it directly affects the amount of disposable income in the population. These decisions have a cascade effect: first, purchasing power changes, then demand in traditional markets, and ultimately the cryptocurrency market reacts to these changes.

What is Fiscal Policy?

Fiscal policy is the strategy of managing the economy through control of taxation and government spending. By adjusting these two tools, governments aim to influence unemployment levels, inflation, and overall economic development.

The basic idea is simple: if people have more money — they spend more, businesses activate, and jobs are created. If there is less money — economic activity declines, which can help curb inflation.

Three Dimensions of Impact: How Governments Manage the Economy

When the budget is balanced: Neutral strategy

Government expenditures equal tax revenues. It’s like a household that carefully plans expenses based on available income — spends exactly what it earns.

Germany in 2019 demonstrated this approach, maintaining a balanced budget. The goal was simple: ensure stability without additional debt.

When the government opens its wallet: Expansionary policy

The government increases spending or cuts taxes, injecting additional money into the economy. This is a standard response to recession or high unemployment.

During the 2008 economic crisis, the US widely implemented tax cuts. The result? People had more cash in hand, started renovating homes, buying goods, and businesses began hiring new employees. Consumer demand increased, and the economy started recovering.

This kind of stimulus was also implemented during the COVID-19 pandemic, when governments distributed aid to the population. A significant portion of these funds ended up on cryptocurrency exchanges.

When the government tightens the screws: Contractionary policy

Spending is reduced, taxes are increased. Money is withdrawn from the economy to slow growth and control inflation.

In the early 1980s, the US adopted such policies to combat high inflation. They raised taxes, cut spending — and although this helped stabilize prices, unemployment temporarily rose.

Cryptocurrency as a Barometer of Fiscal Policy

When there’s more money: What happens to crypto?

Expansionary fiscal policy is a boon for risky assets, including bitcoin and ether. Why? Because people have more free money for investments.

Suppose the current tax cut gives you extra income. Some will spend it on current needs, but many will consider investment opportunities. Cryptocurrency, as a risky asset with growth potential, becomes an attractive target. When millions of such investors exist, demand rises, and prices increase.

When there’s less money: Pressure on crypto

Contractionary policy acts like cold water for speculative markets. Less money in people’s hands means less investment in risky assets. Bitcoin and other crypto assets are the first to feel the pressure, as they are discretionary investments rather than essential expenses.

When the government raises taxes, people review their portfolios and often cancel plans to buy cryptocurrencies. Demand drops, and prices fall accordingly.

Why is this especially important now?

The global economic situation is constantly changing. Central banks and governments continually adjust fiscal policies in response to inflation, unemployment, and geopolitical factors.

As a crypto trader or investor, understanding these changes gives you a competitive edge. Announcements about tax changes or new government spending can be tracked, analyzed, and used to forecast movements in the cryptocurrency market.

Pros of Government Intervention in the Economy

Stability and predictability. Proper fiscal policy can smooth out economic cycles, reducing extreme fluctuations in unemployment and prices.

Infrastructure development. Government spending on transportation, telecommunications, and other projects creates a foundation for long-term economic growth.

Accessibility of services. Through progressive taxation, governments can fund healthcare and education for all segments of the population.

Conclusion

Fiscal policy is often overlooked by crypto investors, but its significance in shaping market conditions cannot be overstated. When governments inject money into the economy, cryptocurrencies often see increased demand. When they cut spending, crypto markets typically experience pressure.

Understanding these mechanisms will help you navigate the market better and make more informed decisions regarding investments in digital assets.