Why is the Fed’s interest rate cut not necessarily good for Bitcoin?
Recent data suggests the Federal Reserve is increasingly likely to begin cutting interest rates this year, with September being the most likely, catering to cryptocurrency bulls’ long-standing expectations for a more risk-tolerant macroeconomic environment.
It is widely believed that rate cuts will increase fiat liquidity, thereby boosting demand for riskier investments such as Bitcoin (BTC).
While this logic holds true, markets may have already priced in the impact of any easing.
Rate cut expectations have dominated sentiment in both crypto and traditional markets since the second half of 2022 and have been one of the key drivers of Bitcoin's surge from 2022 lows near $15,000 to this year's all-time high above $73,000.
Therefore, an actual rate cut may not trigger a strong reaction from the market. (Similar to the realization of expectations) What deserves more attention is the background of the interest rate cut. If the interest rate cut occurs during a period of low inflation and economic prosperity, the stimulating effect of asset prices may be more significant.
However, if the rate cut comes as signs of economic weakness emerge, it could send a negative signal, prompting investors to shift funds from riskier assets to safer assets such as government bonds.
The founder of 10x Research said in a report: “If the Fed cuts interest rates in September 2024 simply because of inflation concerns, this may have a short-term benefit for Bitcoin. But if economic growth concerns push for a rate cut, whether in September or Even later, Bitcoin may face significant selling pressure.”
Historically, Bitcoin has seen its largest gains when the Federal Reserve pauses its rate hike cycle. A first rate cut usually elicits a tepid response. For example, Bitcoin rose +19% in the week after the interest rate cut on July 31, 2019. However, Bitcoin’s gains have flattened two weeks later, with rate cuts in the second half of 2019 due to economic uncertainty and causing BTC prices to fall. Data shows that the price of cryptocurrencies fell by 33% in the second half of the year.
The U.S. economy was in the late stages of expansion at the end of the second quarter, according to the Business Cycle Tracker. Leading indicators such as new orders for consumer goods and materials and consumer confidence point to weakness ahead.
If weakness becomes more pronounced in the coming months, rate cuts will do little to help risk assets including BTC
