——Rational analysis and risk warning
In the cryptocurrency market, you can often hear some “big Vs” or so-called experts assert that the Federal Reserve’s monetary policy, especially interest rate cuts, have a direct causal relationship with the price trend of cryptocurrencies, and even encourage investors to buy large amounts of cryptocurrencies when the Federal Reserve cuts interest rates.
They claim that the Fed’s rate cuts will lead to a depreciation of the dollar, a general rise in asset prices, and that “decentralized” cryptocurrencies in particular will become the biggest winners. However, this view is extremely misleading and even dangerous.
We need to calmly analyze from multiple dimensions such as politics, economy, monetary policy and global situation. The Fed’s interest rate cut does not necessarily have a direct connection with the cryptocurrency market. Blindly believing in these views may make investors become “leeks” in the financial market.
At the global political level, countries have extremely complex attitudes towards cryptocurrencies. Although cryptocurrencies are named "decentralized", in fact, government regulation of currencies is of great importance. If cryptocurrencies want to gain legitimacy worldwide, they must be strictly regulated by various countries.
In fact, in recent years, governments have become more cautious or even tough on cryptocurrencies. Many countries, including China, have already imposed strict controls on cryptocurrency transactions, and the United States is also continuously strengthening compliance supervision of crypto assets. Therefore, monetary policies such as the Fed's interest rate cuts alone cannot change the severe regulatory situation facing cryptocurrencies.
From a political perspective, the U.S. dollar, as the world’s reserve currency, remains one of the most important financial instruments in the United States. The U.S. government will never allow cryptocurrencies to threaten the status of the U.S. dollar without effective supervision.
Therefore, there is no direct policy connection between the Fed’s monetary policy and cryptocurrencies. Every decision made by the Fed is more about the overall economic goals of the United States and global financial stability, rather than a preference for a specific asset class (such as cryptocurrencies). Those “big Vs” who directly link the Fed’s interest rate cuts with cryptocurrency prices are more of a one-sided and misleading interpretation.
The main purpose of interest rate cuts is to stimulate economic growth and reduce borrowing costs, thereby promoting consumption and investment. However, interest rate cuts usually have a greater impact on traditional asset markets such as stocks and real estate because these assets are directly related to economic activities.
Although cryptocurrency can also be considered a "risk asset", its connection with the real economy is extremely weak. The price fluctuations of most cryptocurrencies are more dependent on market sentiment, technical trends and hype than economic fundamentals.
In addition, the volatility of the cryptocurrency market is much higher than that of traditional assets. During the interest rate cut cycle, although more liquidity may enter the market, these funds will not necessarily flow into the cryptocurrency market. Instead, they may enter the more certain and stable traditional investment market. The cryptocurrency market is still in a relatively early stage, lacking sufficient economic support, and is extremely susceptible to speculation and market sentiment. Therefore, it is extremely irresponsible to simply equate the Fed's interest rate cut with an increase in cryptocurrency prices.
The Fed’s monetary policy, especially interest rate cuts, mainly affects the liquidity and value of the US dollar. Interest rate cuts mean lower borrowing costs and more US dollars in the market, which may theoretically lead to a depreciation of the US dollar. However, the value of the US dollar does not only depend on the Fed’s interest rate policy, it is also affected by the global market demand for the US dollar.
As the world’s reserve currency, the demand for the U.S. dollar remains high around the world, especially when global geopolitical uncertainties increase, the U.S. dollar becomes a safe-haven asset. Therefore, even if the Fed cuts interest rates, the U.S. dollar will not necessarily depreciate significantly.
Cryptocurrencies, especially assets like Bitcoin, are often promoted by their supporters as "digital gold" and a tool to combat the depreciation of fiat currencies. However, the actual depreciation of the U.S. dollar and the price trend of cryptocurrencies are more affected by complex factors in the global financial market, rather than just a single event of the Fed's interest rate cut. Views that attempt to directly link cryptocurrencies to the depreciation of the U.S. dollar simply simplify the impact of monetary policy on global markets.
Uncertainty in the global situation, such as geopolitical conflicts, epidemics, and great power competition, often affects the sentiment of financial markets. However, the cryptocurrency market is not necessarily always linked to the global situation like traditional financial markets. On the contrary, the extreme volatility and speculation of the cryptocurrency market are often out of touch with the actual situation of the global economy.
For example, during the pandemic in 2020, global stock markets were severely hit, but the cryptocurrency market experienced explosive growth. This growth relied more on investors’ risk aversion and market hype rather than the support of global economic fundamentals.
Even if the Fed cuts interest rates, the uncertainty in the global situation may make investors more inclined to hold stable fiat currencies or traditional safe-haven assets rather than enter the highly volatile cryptocurrency market. Price fluctuations in the cryptocurrency market are more driven by market sentiment and technical trends rather than the direct impact of global macroeconomics and monetary policies.
There is no direct and essential correlation between the Fed’s rate cut and the cryptocurrency market. Those who closely link the two are often oversimplified and even misleading. The cryptocurrency market is still a highly speculative market in nature, which is far more affected by emotions and hype than economic fundamentals.
Blindly believing in the remarks of so-called “big Vs” and pinning hopes on a surge in cryptocurrencies through the Federal Reserve’s interest rate cuts is tantamount to gambling and can easily turn investors into “leeks” to be harvested.
In this market full of uncertainty and high volatility, rational investment and careful analysis are particularly important. Whether it is politics, economy, monetary policy or global situation, they all remind us that cryptocurrency is not a "shortcut" to financial freedom. On the contrary, the pursuit of short-term profits is often accompanied by greater risks and uncertainties.
~Ming Dao
