The Federal Reserve's interest rate cuts usually have multiple effects on the cryptocurrency market, mainly reflected in capital inflows, the highlighting of asset attributes, and the boosting of market sentiment, as detailed below:
Capital inflows drive price increases: Interest rate cuts will lower borrowing costs for businesses and individuals, and the scale of bank credit may expand, increasing liquidity in the market. This new liquidity may flow into risky asset areas such as the cryptocurrency market in pursuit of higher returns, thus increasing demand for cryptocurrencies and driving up their prices. For example, after the Federal Reserve cuts interest rates by 50 basis points in September 2024, Bitcoin quickly surged, rising from the $60,000 mark to the $62,000 mark, while Ethereum also broke through $2,400, with a 24-hour increase of 3.58%.
Highlighting safe-haven properties to attract funds: Some cryptocurrencies, such as Bitcoin, are seen by certain market participants as assets with safe-haven characteristics. In the loose monetary policy environment brought about by interest rate cuts, inflation expectations may rise, and economic uncertainty will also increase. Bitcoin's role in resisting inflation and economic uncertainty will be highlighted, thereby attracting investors to include it as part of their asset allocation, prompting capital inflows and boosting its market valuation.
Boosting market sentiment and enhancing activity: The Federal Reserve's interest rate cuts are typically viewed as a signal of loose monetary policy, which increases market preference for risk assets. Cryptocurrency investors' confidence may therefore be strengthened, trading activity may increase, and more investors may be willing to participate in cryptocurrency trading, whether for short-term speculative trading or long-term investment holding, making the market more active and helping to warm up the overall cryptocurrency market.
Lower staking costs: During the Federal Reserve's interest rate cut phase, market liquidity increases, borrowing rates decline, and the staking costs in the cryptocurrency market will also decrease accordingly. Investors may expand investments by increasing staking lending, which could further drive up cryptocurrency prices, but they also need to pay attention to controlling leverage risks.
Changes in correlation with the US dollar: During the interest rate cut cycle, the US dollar often faces depreciation pressure, which affects the exchange rate performance of stablecoins and other cryptocurrencies linked to the dollar. For investors holding non-dollar assets, there may be a tendency to transfer assets to the cryptocurrency market in search of better preservation of value or appreciation opportunities, and the demand for stablecoins like USDT may also change, thereby affecting the flow of funds and price trends in the entire cryptocurrency market.
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