How State Financing Shapes Crypto Markets: An Overview of Fiscal Policy

Summary

• Fiscal policy includes government tax and spending measures that influence economic growth, employment, and price stability.
• Three forms of manifestation exist: balanced, stimulating, and dampening variants.
• All three orientations directly affect digital assets - changes in money supply lead to demand shocks in the crypto market.
• Government spending affects disposable household income and thereby the investment potential in cryptocurrencies.

Introduction: Why Government Spending is Important for Investors

Economic dynamics arise from the interplay of production, employment, and money supply. Governments use fiscal measures to steer these factors. Those trading digital assets like Bitcoin or Ether should understand that governmental decisions regarding the tax system and budget expenditures also influence price developments. This article outlines the strategies available and how they shape the cryptocurrency market.

Basics: What is fiscal policy?

Economists understand fiscal policy as all methods by which a state influences economic development through taxes and state budgets. Governments change tax rates and expenditure volumes to control price trends, create employment effects, and influence gross domestic product. At its core, it is about changing the disposable income of citizens and businesses – which has immediate consequences for consumption, saving, and investment.

The Three Models of Government Financial Policy

Balanced fiscal policy

A balanced fiscal policy means that the state synchronizes its revenues and expenditures. It neither stimulates nor further restrains the economy – the equilibrium is maintained.

Example for illustration: A household manager earns 1,000 euros monthly, and together with his partner, they earn 2,000 euros. He plans to spend exactly this amount. No surpluses, no deficits. The state operates in the same way: Revenue = Expenditure.

Germany consistently practiced this model in 2019. The Bundestag approved a budget without new borrowing. The goal: economic stability without additional debt burdens.

Stimulative fiscal policy: More money in the economy

When a government lowers taxes and simultaneously increases public spending, it injects additional purchasing power into the overall economy. Typically, this occurs during recessionary periods or times of high unemployment. The plan: consumers spend more, businesses invest more, and new jobs are created.

Scenario: After a tax cut, two citizens, Anna and Max, suddenly have an extra 500 euros monthly. Anna renovates her house, Max buys a new computer. The demand for construction services and electronics rises, craftsmen and electronics stores hire more staff. National income grows, the velocity of money increases.

Historical example: The US government responded to the financial crisis in 2008 with massive tax cuts. Millions of households kept more of their income. They spent this money – on cars, furniture, renovations. Businesses hired more staff. The snowball effect kicked in: higher incomes led to even more spending.

Restrictive fiscal policy: withdrawing money from the economy

The opposite: The state raises taxes and cuts spending. Its goal is to curb excessive economic growth and combat rising prices. The restrictive fiscal policy reduces overall purchasing power – people and businesses have fewer resources available.

Example: After the government raises taxes, Anna and Max earn less in real terms. Anna gives up on buying a car, Max postpones major purchases. Demand decreases, store sales decline, and unemployment temporarily rises. However, the inflation rate stabilizes.

Practice: In the early 1980s, the USA fought against double-digit inflation rates. The restrictive fiscal policy with tax increases and spending cuts cooled down the economy. Prices fell, but unemployment temporarily rose.

Why the Crypto Market Reacts to Fiscal Policy

Effect of stimulus measures on digital currencies

When governments lower taxes or distribute transfer payments, more liquid capital flows to individuals and companies. A side effect: some of these funds are moving into cryptocurrencies.

Concrete Case: After a tax credit, investor Lisa has an extra 2,000 euros. She decides to invest 500 euros in Bitcoin and Ethereum. Thousands of other citizens do the same. Demand for digital assets rises, trading volumes increase, prices climb.

COVID-19 pandemic: Many states distributed stimulus checks. A portion of the recipients used this money for crypto investments – one of the reasons why the crypto market exploded in 2020–2021.

Effects of austerity measures on Bitcoin and altcoins

If the state increases taxes and reduces spending (restrictive fiscal policy), private purchasing power decreases. Fewer people can invest in risky assets like cryptocurrencies. Lisa only has 1,000 euros left to spend after tax increases – nothing remains for cryptos.

The result: Demand is falling, volumes are normalizing, price expectations are decreasing. Stagnation or correction are likely.

Government stimulus programs as price drivers

Direct transfers to citizens are particularly effective – stimulus checks, unemployment benefits, child allowances. These instruments immediately release purchasing power. During the pandemic from 2020 to 2021, several countries provided such programs. A measurable portion flowed into cryptocurrency exchanges, which intensified price increases.

Positive Long-term Effects of Fiscal Policy

economic stabilization

With fiscal measures, states can smooth out booms and busts. Recessions are shortened by tax cuts, while overheating is curbed by austerity measures.

infrastructure investments

Higher government budgets often mean better roads, rail networks, telecommunications – investments that promote long-term growth.

Universal Public Services

Tax revenues finance health, education, and security. Countries like Sweden use progressive taxation to ensure all citizens have free access to universities and medical practices.

Conclusion

Fiscal policy – taxes and government budgets – shapes the macroeconomic landscape. Those trading cryptocurrencies or other assets must understand that restrictive fiscal policy can lead to price declines through lower demand, while expansionary measures can pump additional liquidity into the market. Bitcoin, Ether, and the entire crypto market respond to these monetary impulses. Therefore, looking at the fiscal policy of major economies – the USA, Eurozone, China – helps in predicting market trends.