Original author: Viee, Biteye

Federal Reserve Chairman Jerome Powell recently said that "the time has come to adjust policy," suggesting that a rate cut is imminent. Will the Fed’s interest rate cut definitely drive up the price of Bitcoin?

Will Cryptocurrency Markets Definitely Benefit from Interest Rate Cuts?

This article will delve into these issues, analyze how the Federal Reserve's interest rate cuts affect the rise in Bitcoin prices, and the risks to be aware of.

01 Purpose and background of interest rate cut

The main purpose of the Federal Reserve's interest rate cuts is to reduce borrowing costs and stimulate economic activity. In recent years, factors such as inflationary pressure, global trade frictions and the COVID-19 epidemic have made the Federal Reserve more cautious in monetary policy. Interest rate cuts usually occur when economic growth slows down or faces the risk of recession. To do this, we need to understand the following two concepts:

  • Slowing economic growth: When economic growth slows down, business and consumer confidence declines, and investment and consumption intentions weaken. The Federal Reserve cuts interest rates to reduce borrowing costs, encourage investment and consumption, and thereby promote economic recovery.

  • Inflation expectations: Cutting interest rates may trigger an increase in inflation expectations. When investors face the risk of inflation, they often seek anti-inflation assets, such as cryptocurrencies such as Bitcoin.

02 The positive factors of interest rate cuts on the rise of Bitcoin prices

Historical data shows that rate cuts by the Federal Reserve usually help drive Bitcoin prices higher.

The reason is simple. Cutting interest rates reduces the cost of capital, motivating investors to invest in high-risk, high-yield assets such as Bitcoin.

Therefore, the positive factors for Bitcoin from interest rate cuts mainly include:

  • Stimulate investment: In a low interest rate environment, investors tend to seek higher returns, driving up the price of Bitcoin.

  • Improving market sentiment: The interest rate cut is intended to stimulate economic growth and promote economic recovery, sending a positive policy signal from the Federal Reserve. Prompting investors to be more willing to take risks, prompting more funds to flow into Bitcoin.

  • Promote Bitcoin's anti-inflation properties: Interest rate cuts may lead to lower yields on traditional safe-haven assets and raise inflation expectations, making Bitcoin's anti-inflation properties as digital gold more obvious. Many investors may view Bitcoin as a tool to fight inflation, driving its demand and price higher.

  • Increase market liquidity: The easing of monetary policy brought about by interest rate cuts increases market liquidity, making it easier for investors to enter the market, driving up the price of Bitcoin.

03 Historical cases of the Federal Reserve affecting Bitcoin prices

First, let’s review the recent interest rate cut/raise cycles.

From December 2018 to July 2019, the price of BTC experienced an increase from US$3,000 to US$13,000. The Federal Reserve began cutting interest rates in July 2019, and the market began to reflect expectations of interest rate cuts in April 2019.

During the period from July 2019 to March 2020, despite the Federal Reserve starting to cut interest rates, Bitcoin prices first fell and then rose. After the rate cut, the price of Bitcoin fell by more than 30% from $13,000 to $7,000. Price fluctuations at this stage reflect the market's different interpretations of interest rate cuts, showing that interest rate cuts do not always bring about an immediate positive market reaction.

In March 2020, affected by the COVID-19 epidemic, the Federal Reserve quickly cut interest rates and launched large-scale quantitative easing. The market lagged slightly and ushered in the main rise at the end of 2020 and the beginning of 21. This cycle saw Bitcoin prices rise from $3,000 to $65,000.

During the interest rate hike cycle from March 2022 to July 2023, Bitcoin prices fell from as low as $45,000 to $15,000, experiencing a nine-month decline. The performance at this stage shows that the market is more sensitive to interest rate increases, and expectations of interest rate cuts do not appear before prices recover.

Therefore, depending on historical circumstances, the market reaction after a rate cut may be early or late, and in most cases it will be bullish for Bitcoin. It should be noted that in a few cases, the market may face selling pressure, leading to a decline, which may first fall and then rise.

04 There is selling pressure on Bitcoin

If the rate cut is due to signs of a recession, the market may become pessimistic about future economic prospects. In this case, investors may choose safe-haven assets instead of Bitcoin. Although Bitcoin is considered digital gold, during economic recessions, investors may prefer traditional safe-haven assets such as gold, leading to a decline in demand for Bitcoin. In addition, regulatory policy uncertainty and widespread black swan events will also affect the effect of interest rate cuts. These situations can lead to selling pressure in the market.

05 Summary

After the launch of spot ETFs, the impact of U.S. dollar liquidity on the crypto market will become increasingly apparent, but the impact of the Federal Reserve’s interest rate cuts on Bitcoin prices is complicated.

The market reaction to interest rate cuts may be early or delayed and is affected by a variety of factors. It should be noted that under certain circumstances, such as concerns about economic recession, uncertainty about regulatory policies, reversal of market sentiment, etc., it may lead to certain selling pressure on Bitcoin.

What's more, the Federal Reserve's monetary policy is an important factor affecting the price of Bitcoin, but it is not the only factor. Therefore, one should pay close attention to various market factors in order to make rational investment decisions.

(The above content is excerpted and reprinted with the authorization of partner MarsBit, original text link | Source: Biteye)

Statement: The article only represents the author's personal views and opinions, and does not represent the objective views and positions of the blockchain. All contents and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the author and Blockchain Client will not be held responsible for any direct or indirect losses caused by investors' transactions.

〈The Fed’s interest rate cut is coming, will the Bitcoin bull market be far behind? 〉This article was first published in "Block Guest".