The upcoming Fed’s Rate-cuts: A Bullish Signal for Bitcoin and other Cryptos?

By Raghav
Sawhney

The
upcoming
Fed
meeting
on
the
30-31st
July
has
investors
and
the
crypto
community
on
the
edge
of
their
seats
about
the
Fed
interest
rate-cuts
in
September
and
its
direct
impact
on
cryptocurrencies
like
Bitcoin. 

In
2024,
we
face
potential
rate
cuts,
with
the
inflation
rate
slowing
down
to
3%
compared
to
last
year’s
9%.
Understanding
the
Fed’s
moves
for
retail
and
their
impact
is
crucial,
especially
in
the
volatile
markets
of
cryptocurrencies.
Even
more
so
now
that
the
Crypto
community
is
expecting
the
bull
run
to
be
kick-started
by
the
very
first
rate
cut!

The
Fed’s
Tool

The
Federal
Reserve
(Fed)
is
the
central
banking
system
of
the
United
States.
It
is
responsible
for
implementing
monetary
policies,
regulating
banks,
and
ensuring
general
financial
stability.

Interest
rates,
specifically
the
federal
funds
rate,
are
the
Fed’s
primary
mechanism
for
regulating
the
economy.
By
raising
or
lowering
this
rate,
the
Fed
can
influence
everything
from
borrowing
costs
to
consumer
spending
and
business
investment.

Historically,
the
Fed’s
decisions
have
been
the
centre
of
navigating
economic
cycles
which
have
consisted
of
market
booms,
recessions
and
inflations
but
its
main
aim
has
always
been
to
maintain
the
intricate
balance
between
Maximum
employment
and
a
stable
level
of
inflation.

Historical
Snapshot

During
2017-18,
the
Fed’s
interest
rate
hikes
coincided
with
a
significant
drop
in
Bitcoin’s
price.
From
a
high
of
nearly
$20,000
in
December
2017,
Bitcoin
dropped
to
around
$3,200
by
December
of
2018,
this
was
caused
by
the
tightening
monetary
policy
and
a
relatively
stronger
dollar.

In
2020,
the
Fed
cut
down
interest
rates
to
near
zero
in
response
to
the
COVID-19
pandemic
which
resulted
in
a
surge
in
Bitcoin
and
other
digital
assets.
Bitcoin
reached
a
new
all-time
high
in
the
following
months
of
around
$29,000.

Then
the
Fed
started
introducing
a
rapid
series
of
interest
rate
hikes,
starting
in
early
2022.
This
led
to
a
substantial
decline
in
Bitcoin
and
other
cryptocurrencies.
As
interest
rates
increased,
the
cost
of
capital
rose,
prompting
investors
to
shift
towards
more
stable
assets
and
causing
significant
sell-offs
in
the
crypto
market.

A
Pause
Before
Potential
Cuts

The
Reserve
has
recently
opted
to
maintain
the


rate
at
5.25-5.50%.
Many
speculate
that
this
decision
reflects
a
cautious
approach
amidst
mixed
economic
signals.

Analysts
now
anticipate
that
the
Fed
will
begin
cutting
rates
by
September
2024
as
the
latest
consumer
price
index
(CPI)
report
showed
inflation
dropping
to
negative
values
in
June
(-0.1%)
from
May
(0.0%).
According
to
the


CME
FedWatch
tool,
the
probability
for
September
cuts
is
almost
89%
and
there’s
an
increased
probability
for
consequent
cuts
in
November
and
December.

The
current
pause
in
the
Fed’s
rates
follows
a
series
of
aggressive
rate
hikes
initiated
during
March
2022,
that
aimed
to
curb
soaring
inflation
which
peaked
at
over
9%
last
year​.
On
the
other
hand
it
has
led
to
Bitcoin
surging
from
the
2022
lows
of
$15,000
to
its
ATH
this
year
at
$73,000. 

“In
general,
high
interest
rates
scare
investors
away
from
riskier
investments
like
crypto,
and
the
lowering
of
rates
will
be
seen
as
a
positive
by
the
crypto
investor
community.”

says
Dan
Raju,
CEO
of
Tradier
which
is
a
brokerage
platform.

While
riskier
assets
like
cryptocurrencies
had
plummeted
in
2022,
the
rate
hikes
had
had
an
opposite
effect
on
another
safer
asset
class
which
consisted
of
oil
and
other
commodities.
But
those
effects
remained
short
lived
and
by
2023,
both
Crypto
Currencies
and
commodities
had
stabilised.

The
Broader
Market
Impact:
Stocks
and
Commodities

The
ripple
effect
of
the
Fed’s
rate
decisions
extends
way
beyond
cryptocurrencies.
Stock
markets
have
also
shown
significant
drawdowns,
time
and
again,
following
the
onset
of
rate
cut
cycles.
This
has
taken
place
especially
when
those
cuts
are
driven
by
economic
weaknesses. 

For
instance,
past
instances
of
rate
reductions
have
often
been
accompanied
by


stock
market
declines

as
investors
reassess
risks
and
economic
forecasts.

Commodities
like
oil
also
react
to
Fed
policies.
In
recent
years,
oil
prices
have
stabilised
around
$70-$80
per
barrel,
reflecting
a
balance
between
supply
constraints
and
market
expectations
of
lower
rates.
The
anticipation
of
rate
cuts
has
helped
prevent
a
substantial
decline
in
prices,
despite
global
supply
dynamics​​.

The
Crypto
Connection:
Bitcoin
and
Fed
Policies

Cryptocurrencies,
especially
Bitcoin,
have
shown
sensitivity
when
it
comes
to
Fed
rate
decisions.
Historically,
Bitcoin
thrived
during
periods
of
Fed
rate
pauses.

“During
the
Fed’s
pause
from
rate
hikes
until
July
2019,
bitcoin
experienced
explosive
growth,
returning
+169%.
Following
a
seven-month
pause
in
2019,
the
Fed
cut
interest
rates,
initiating
a
steep
rate-cutting
cycle.
Initially,
bitcoin
responded
positively,
rallying
+19%
within
a
week
after
the
July
31,
2019,
rate
cut.
However,
two
weeks
later,
Bitcoin
was
back
to
flat,”
Thielen
said.

Early
this
year,
Bitcoin
soared
to
record
highs
($73,000),
driven
by
the
anticipation
of
rate
cuts. 

It
was
in
November
2021
that
retail
realised
that
the
central
bank
was
serious
about
calibrating
monetary
policies
and
that
was
when
cryptocurrencies
and
other
riskier
assets
peaked.

Cryptocurrency
prices
struggled
ever
since
the
Fed
announced
in
November
2021
to
raise
rates
and
throughout
2022
as
they
followed
up
on
their
decision.
But
now
with
the
introduction
of
Bitcoin
ETFs,
which
caused
the
price
of
BTC
to
reach
an
ATH
in
March,
the
potential
inflows
due
to
Ethereum
ETF
and
the
upcoming
prospect
of
lowering
interest
rates,
Cryptocurrency
prices
are
speculated
to
be
highly
bullish
assets!

With
the
latest
announcement
made
by
Jerome
Powell,
Fed
Chairman,
about
how
the
they
will
not
be
waiting
for


inflation
to
reach
2%
before
they
start
rate
cuts,
being
made
very
recently,
crypto
markets
have
already
started
showing
impact:

• 
  Dogwifhat(WIF)
  and
  Floki(FLOKI)
  jumped
  more
  than
  20%
  in
  the
  part
  24
  hrs
• 
  Bitcoin
  reached
  a
  one-month
  high
  (this
  month)
  at
  $67k+.

Bullish
for
Investors?

When
interest
rates
are
involved,
it
introduces
a
highly
volatile
factor
in
the
case
of
investors.
All
asset
classes,
whether
cryptocurrencies
or
safer
ones
like
commodities
are
affected
and
the
market
becomes
unpredictable. 

So
it
is
said
that
the
best
strategy
for
investors
during
such
times
is
to
diversify
their
investments
and
stick
to
a
long-term
plan
rather
than
taking
chances
and
making
paper
decisions. 

Lowered
interest
rates
do
make
riskier
assets
more
appealing
for
investors
who
look
for
a
high
ROI,
thus
leading
to
an
increased
demand
for
ETFs
(stock
or
crypto).

The
Road
Ahead

However,
the
real
test
lies
ahead:
if
the
Fed’s
cuts
are
a
response
to
standing
strong
economic
health,
Bitcoin
could
see
continued
growth.
But
if
cuts
are
in
response
to
economic
fragility,
risk
aversion
might
arise
towards
cryptocurrencies
like
Bitcoin
and
drive
investors
towards
safer
assets
like
government
bonds​.

Although,
at
the
moment,
it
is
noticed
that
the


general
sentiment

of
people
going
for
safer
assets
is
somewhat
short.







Understanding
the
Fed’s
interest
rate
policies
and
their
broader
implications
is
essential
for
navigating
today’s
complex
investment
landscape.
The
interplay
between
Fed
decisions,
economic
health,
and
market
sentiment
will
continue
to
shape
the
financial
landscape,
making
informed
decision-making
more
important
than
ever.