The interest rate cut is coming. Is the bull market far away?

Fed Chairman Powell recently said that "it's time to adjust policy", suggesting that interest rate cuts are coming.

Will the Fed's interest rate cuts definitely drive up Bitcoin prices?

Will the crypto market definitely benefit from interest rate cuts?

This article will explore this issue in depth, analyzing how the Fed's interest rate cuts affect the rise in Bitcoin prices, as well as the risks that need to be noted.

01 Purpose and Background of Interest Rate Cuts

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

• Economic growth slowdown: When economic growth slows, corporate and consumer confidence declines, and the willingness to invest and consume weakens. The Federal Reserve reduces borrowing costs by cutting interest rates, encouraging investment and consumption, thereby promoting economic recovery.

• Inflation expectations: Interest rate cuts may trigger rising inflation expectations. When facing inflation risks, investors often seek inflation-resistant assets, such as cryptocurrencies such as Bitcoin.

02 Positive factors for the rise in Bitcoin prices

Historical data shows that the Federal Reserve's interest rate cuts usually help drive up Bitcoin prices.

The reason is simple. The interest rate cut reduces the cost of funds and encourages investors to invest in high-risk and high-return assets, such as Bitcoin.

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

• Stimulate investment: Investors tend to seek higher returns in a low-interest rate environment, driving up Bitcoin prices.

• Improve market sentiment: The interest rate cut is for the purpose of stimulating economic growth and promoting economic recovery, and conveys the Fed's positive policy signal. It makes investors more willing to take risks and prompts more funds to flow into Bitcoin.

• Push up the anti-inflation characteristics of Bitcoin: Interest rate cuts may lead to lower returns on traditional safe-haven assets, and the resulting higher inflation expectations make Bitcoin's anti-inflation characteristics as digital gold more obvious. Many investors may see Bitcoin as a tool to fight inflation, thereby driving up its demand and price.

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

03 Historical cases of the Federal Reserve influencing Bitcoin prices

First, let's review the recent interest rate cut/hike cycles.

From December 2018 to July 2019, the price of BTC experienced a process of rising from $3,000 to $13,000. The Federal Reserve began to cut interest rates in July 2019, and the market began to react to the expectation of interest rate cuts in April 2019.

From July 2019 to March 2020, although the Federal Reserve began to cut interest rates, the price of Bitcoin fell first and then rose. After the interest rate cut, the price of Bitcoin fell from $13,000 to $7,000, a drop of more than 30%. The price fluctuations during this period reflected the market's different interpretations of the interest rate cut, showing that interest rate cuts do not always bring immediate positive market reactions.

In March 2020, affected by the COVID-19 pandemic, the Federal Reserve quickly cut interest rates and launched large-scale quantitative easing. The market lagged slightly and ushered in the main uptrend at the end of 20-early 21. In this cycle, the price of Bitcoin rose from $3,000 to $65,000.

During the interest rate hike cycle from March 2022 to July 2023, the price of Bitcoin fell from a low of $45,000 to $15,000, experiencing a 9-month decline. The performance of this stage shows that the market is more sensitive to interest rate hikes, and the expectation of interest rate cuts did not appear before the price rebounded.

Therefore, according to historical conditions, the market reaction after the interest rate cut may be ahead of schedule or delayed, and in most cases it is good for Bitcoin to rise. It should be noted that in a few cases, the market may face selling pressure, resulting in a decline, which may show a decline first and then rise.

04 Bitcoin is under selling pressure

If the rate cut is due to signs of a recession, the market may be pessimistic about the future economic outlook. In this case, investors may choose safe-haven assets instead of Bitcoin. Although Bitcoin is regarded as digital gold, during a recession, investors may prefer traditional safe-haven assets such as gold, resulting in a decline in demand for Bitcoin. In addition, the uncertainty of regulatory policies and the black swan events with wide influence will also affect the effect of rate cuts. These situations may lead to selling pressure in the market.

05 Summary

After the launch of spot ETFs, the impact of US dollar liquidity on the crypto market will become more apparent, but the impact of the Fed's rate cut on Bitcoin prices is complicated.

The market reaction to the rate cut may be early or delayed, and is affected by a variety of factors. It should be noted that in some cases, such as concerns about economic recession, uncertainty in regulatory policies, and reversals in market sentiment, there may be a certain amount of selling pressure on Bitcoin.

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