🔥🔥🔥HOW RATE CUTS AFFECT THE PRICE OF RISKY ASSETS LIKE CRYPTO!
Rate cuts occur when a central bank (like the US Federal Reserve, European Central Bank, or Bank of England) lowers its key policy interest rates.
The primary goals are to:
1. Stimulate borrowing:
Make loans cheaper for businesses and consumers.
2. Boost spending & investment: encourage economic activity.
3. Lower savings returns:
Make holding cash/bonds less attractive.
4. Manage inflation/employment:
Lower interest rates generally boost the price of risky assets, and crypto is often considered one of the riskiest. Here's how:
1. Increased Liquidity & "Cheap Money":
-Rate cuts inject liquidity into the financial system.
-Borrowing becomes cheaper, meaning investors and institutions can access funds at lower costs.
-This "cheap money" often seeks higher returns, flowing out of safe assets (like savings accounts or government bonds) into riskier assets like stocks, corporate bonds, commodities, and crypto.
2. Lower "Opportunity Cost" of Holding Risky Assets:
-The potential return investors give up by not holding safe assets like government bonds (the opportunity cost) decreases.This makes volatile assets with potentially higher returns (like crypto) relatively more attractive.
3. Increased Risk Appetite
-Rate cuts signal central banks are trying to support growth, boosting investor confidence. This encourages investors to take on more risk in pursuit of higher yields, benefiting crypto.
5. Hedge Against Inflation:
Aggressive rate cuts, especially during periods of high stimulus, can fuel inflation concerns.Some investors view certain cryptocurrencies (notably Bitcoin, with its fixed supply) as potential hedges against inflation, driving demand when expectations rise.
Generally, rate cuts are bullish for risky assets like crypto. They increase liquidity, reduce the appeal of safe assets, encourage risk-taking, & can weaken fiat currencies, all of which tend to drive capital towards higher-risk, higher-potential-return investments, including crypto.
