Interest rate cuts are here, how far can the bull market be?
This article will delve into this issue, analyzing how the Federal Reserve's interest rate cuts affect the rise in Bitcoin prices, as well as the risks that need to be noted.Author: Biteye Core Contributor Viee Federal Reserve Chairman Powell recently stated, "It's time to adjust policy," suggesting that interest rate cuts are imminent.
Will the Federal Reserve's interest rate cuts necessarily drive up Bitcoin prices?
Will the crypto market necessarily benefit from rate cuts?
This article will delve into this issue, analyzing how the Federal Reserve's rate cuts affect the rise in Bitcoin prices and the risks to be aware of.
0 1. Purpose and Background of Rate Cuts
The primary purpose of the Federal Reserve's rate cuts is to lower borrowing costs and stimulate economic activity. In recent years, factors such as inflationary pressures, global trade frictions, and the COVID-19 pandemic have made the Federal Reserve more cautious in its monetary policy, with rate cuts typically occurring during periods of slowing economic growth or recession risks. To understand this, we need to grasp the following two concepts:
Economic Slowdown: When economic growth slows, business and consumer confidence declines, weakening investment and consumption willingness. The Federal Reserve lowers interest rates to reduce borrowing costs, encouraging investment and consumption, thereby promoting economic recovery.
Inflation Expectations: Rate cuts may trigger an increase in inflation expectations. When faced with inflation risks, investors often seek inflation-resistant assets, such as Bitcoin and other cryptocurrencies.
0 2. Positive Factors for Bitcoin Price Rise Due to Rate Cuts
Historical data shows that the Federal Reserve's rate cuts typically help drive up Bitcoin prices.
The reason is simple: rate cuts lower the cost of capital, incentivizing investors to allocate funds to high-risk, high-reward assets like Bitcoin.
Therefore, the positive factors for Bitcoin due to rate cuts mainly include:
Stimulating Investment: In a low-interest-rate environment, investors often seek higher returns, driving up Bitcoin prices.
Improving Market Sentiment: Rate cuts aimed at stimulating economic growth promote economic recovery and convey a positive policy signal from the Federal Reserve. This encourages investors to take on more risk, leading to increased capital inflow into Bitcoin.
Enhancing Bitcoin's Inflation-Resistant Characteristics: Rate cuts may lead to lower yields on traditional safe-haven assets, raising inflation expectations and making Bitcoin's inflation-resistant characteristics as digital gold more pronounced. Many investors may view Bitcoin as a tool to combat inflation, thereby boosting its demand and price.
Increasing Market Liquidity: The monetary policy easing brought about by rate cuts increases market liquidity, making it easier for investors to enter the market and driving up Bitcoin prices.
0 3. Historical Cases of the Federal Reserve's Impact on Bitcoin Prices
First, let's review the recent cycles of rate cuts and hikes.
From December 2018 to July 2019, the price of BTC rose from $3,000 to $13,000. The Federal Reserve began cutting rates in July 2019, while the market started reacting to rate cut expectations as early as April 2019.
During the period from July 2019 to March 2020, despite the Federal Reserve starting to cut rates, Bitcoin's price initially fell before rising. After the rate cuts, Bitcoin's price dropped from $13,000 to $7,000, a decline of over 30%. This price volatility reflects the market's differing interpretations of the rate cuts, showing that rate cuts do not always lead to immediate positive market reactions.
In March 2020, influenced by the COVID-19 pandemic, the Federal Reserve rapidly cut rates and initiated large-scale quantitative easing. The market lagged slightly, experiencing a major upward wave from late 2020 to early 2021. During this cycle, Bitcoin's price rose from $3,000 to $65,000.
In the rate hike cycle from March 2022 to July 2023, Bitcoin's price fell from $45,000 to a low of $15,000, experiencing a nine-month decline. This performance indicates that the market is sensitive to rate hikes, and expectations of rate cuts did not manifest before the price rebound.
Therefore, based on historical situations, the market reaction after rate cuts may occur either in advance or with a delay, and in most cases, it is favorable for Bitcoin's rise. It is important to note that in a few cases, the market may face selling pressure, leading to declines, which may present as a pattern of falling before rising.
0 4. Selling Pressure on Bitcoin
If rate cuts are due to signs of economic recession, the market may feel pessimistic about future economic prospects. In this case, investors may choose safe-haven assets rather than Bitcoin. Although Bitcoin is viewed as digital gold, during economic recessions, investors may prefer traditional safe-haven assets like gold, leading to a decline in Bitcoin demand. Additionally, uncertainties in regulatory policies and impactful black swan events can also affect the effectiveness of rate cuts. These situations may lead to selling pressure in the market.
0 5. Conclusion
After the launch of the spot ETF, the impact of dollar liquidity on the crypto market will become increasingly evident, but the effect of the Federal Reserve's rate cuts on Bitcoin prices is complex.
The market reaction to rate cuts may be either anticipatory or delayed and is influenced by various factors. It is essential to be aware that in certain situations, such as concerns about economic recession, uncertainties in regulatory policies, and reversals in market sentiment, there may be some selling pressure on Bitcoin.
Moreover, while the Federal Reserve's monetary policy is an important factor influencing Bitcoin prices, it is not the only factor. Therefore, it is crucial to closely monitor various market factors to make rational investment decisions.
