Cryptocurrency Investment and Fiscal Policy

Introduction

Risk-on assets thrive when there is enough money in circulation. Such assets include cryptocurrencies, stocks, high-yield bonds and other emerging markets with attractive profits. Who decides how much money is available to public for spending? Obviously, it is the government of a country. The governments devise financial plans for a fiscal year, and term them as fiscal policies.

Fiscal Policy

Governments have many tools up their sleeve to manage the economy. Fiscal policy is a tool that a government uses to collect taxes, manage spending so that economy can run stably and wealth can be distributed rationally. The aims of setting a fiscal policy is to control inflation, create job, avoid or ward off recession, and promote steady economic growth. On-chain activities on many blockchains confirm the fact that volumes surge when the government decides to cut taxes and boost spending. People have more savings to spend on speculative assets like cryptocurrencies.

However, there are three types of fiscal policies. Each has its own functions and restrictions. Not every one of them is conducive to the crypto market.

Types of Fiscal Policy

1. Accommodative (Expansionary) Fiscal Policy

In simple words, an expansionary fiscal policy aims to spend more than earn. Taxation policies are loosened to accommodate citizens. This kind of policy is usually implemented when there is a risk or onset of recession, or when there is any economic emergency like Covid-19 in 2020. Such situations result in widespread layoffs. Unemployment rises to unwanted levels. People have less to spend, so the demand for goods and services plummets headlong. These circumstances dent any economy badly.

The government responds by stimulating public spending by giving tax rebates. Savings increase and people tend to consume goods and hire services. Rising demands also creates new jobs. For example, a family will consider buying new furniture, replacing the old vehicle or renovating their house when they get some increment in savings.

Impacts on Cryptocurrencies

History reveals that risky assets pump when governments decide to implement expansionary fiscal policies. Savings end up in stocks and cryptocurrencies. The most recent example of such policy can be found in 2020. In the cryptocurrency market, it marked the beginning of stupendous bull run. Bitcoin went from $8000 in March 2020 to $69000 in November 2021. Ethereum, many utility tokens, and even meme coins printed millionaires in the course of a year and a half. Such was the boom brough forth by the expansionary fiscal policy.

Drawbacks

Expansionary fiscal policy may appear very attractive on the face value, but it is not without its drawbacks. Increased demands can give rise to inflation if the supply is lower than the demand. Secondly, more spending than earnings increasingly drags national economy to deficit. Government manages the deficit by borrowing. Borrowing pushes the interest rates higher. People tend to invest less and lend more.

2. Restrictive (Contractionary) Fiscal Policy

Just as expansionary fiscal policy adds money and causes demands to rise, restrictive fiscal policy focuses taking money out of the economy by imposing taxes and reducing spending. This can generally happen when accommodated fiscal policy has already resulted in inflation due to increased demands of goods and services. Due to low circulation of money, people delay their plans related to spending. Dwindling demand eases prices a little.

Impacts on Cryptocurrencies

For cryptocurrencies and blockchain world, such policy can prove a nightmare. People get tired of paying taxes. Businesses feel the heat and unemployment can also see a rise. Lack of savings drives people to stay away from speculative assets. Those who save something try to resort to gold and government treasury bonds. However, the price action of Bitcoin ($BTC) over the years has proved that it can prove a hedge against devaluation of fiat currencies and inflation.

Granted that $BTC is far more volatile than gold, it has progressed at incredibly rapid rate. In 2010, we could buy 1 ounce of gold for 4738 $BTC. Now in 2025, only 0.0316 $BTC are required to buy the same amount of gold. This is despite the fact that the price of 1ounce of gold has risen from $1421 to $3632 during this period. But this proved to be no competition for $BTC, which rose from a paltry $0.30 to staggering $115,000. Therefore, many big investors are drifting to Bitcoin rather than Gold for long term hedging.

3. Balanced (Neutral) Fiscal Policy

Unlike the above-mentioned policies, balanced fiscal policy aims to keep spending and earning equal. The purpose of such policies is to keep economic growth at a stable level. When there is neither deflation nor inflation, a balanced policy can work efficiently. The implementation of a balanced policy means the economy is working at its fullest potential and it needs neither any stimulus nor any restraint.

Impacts on Cryptocurrencies

In the absence of any fear or unusual hope, crypto assets are left on their own. Their technical and fundamental analysis influence their price action. In a sense, it is a good situation for investors when no news from the outside world disturbs the market. Otherwise, expansionary or contractionary fiscal policy may bring news that can neutralize chart patterns and play havoc with all sorts of analyses.

Why a Fiscal Policy Is Needed

Inflation, deflation, unemployment, and devaluation of currency can weaken any economy. A rational fiscal policy can help a country fight against these issues. Stimuli provided by expansionary policy and restraints imposed by contractionary policy are the antidotes to the evils plaguing an economy. Countries have proved that an appropriate fiscal policy can help develop infrastructure that can result in enhanced trade activities and better overall economic growth. Increased spending can facilitate provision of enviable life standards as seen in Scandinavian countries.

Conclusion

On the whole, fiscal policy is a tool of the government to stabilize the economy by means of managing taxation and public spending. Accommodative fiscal policy dictates less taxation than spending. Contractionary policy taxes more than spends. A balanced policy keeps revenue and expenditures at equal levels.