Will the Fed’s Rate Cuts Bring Bitcoin Back to a Bull Market?
On August 5th, the Bank of Japan’s interest rate hike triggered severe turbulence in global financial markets. Both the Japanese and American stock markets crashed, and the Bitcoin Fear Index surged nearly 70%. Multiple national stock markets experienced several circuit breakers, and even European and emerging market stocks suffered significant setbacks. Under immense market pressure, people began seeking remedies, calling for the Federal Reserve to cut interest rates to stabilize the market. The Fed’s interest rate cuts might soon arrive, which could mean something even bigger than the Bank of Japan’s rate hike. Will it be enough to pull Bitcoin back into a bull market?
01. Why Does the Federal Reserve Have Such a Huge Influence?
The Federal Reserve, also known as the Federal Reserve Board, is the central banking system of the United States, consisting of 12 regional Federal Reserve Banks. Its goal is to stabilize prices and maximize employment through monetary policy regulation. Inflation rates and employment rates are crucial indicators of economic health, which is why investors and market participants closely monitor these metrics to assess economic prospects and investment risks.
As the central bank of the United States, the Federal Reserve has a significant impact on financial markets. It exerts this influence primarily through monetary policy tools that adjust interest rates, namely, raising or lowering rates:
Raising interest rates means increasing the cost of borrowing between banks, which in turn raises the interest rates that commercial banks charge businesses and individuals. When the Federal Reserve raises rates, the deposit rate for the US dollar increases, leading to higher interest income for depositors and an inflow of funds into the US, reducing investment in other countries. This worsens the economic environment and raises unemployment rates. High interest rates also increase borrowing costs, leading to higher default risks for businesses and individuals, potentially causing company bankruptcies.
Lowering interest rates has the opposite effect, reducing deposit rates and borrowing costs. When the Federal Reserve cuts rates, the US dollar deposit rate decreases, capital flows out of banks and into other countries, promoting global investment and economic recovery.
02. Will Interest Rate Cuts Directly Benefit the Crypto Market?
Although many believe that rate cuts increase market liquidity and reduce borrowing costs, potentially driving up cryptocurrency prices, the increased economic uncertainty in a rate-cut environment might lead investors to turn to Bitcoin and other safe-haven assets. However, some caution against potential economic recession risks.
Many institutions generally believe that in a complex and volatile market environment, significant market fluctuations may still occur during rate cuts. During the 2008 financial crisis, even though the Federal Reserve initially took measures to cut rates, the market still plummeted after a brief peak. Despite the Fed’s swift and significant rate cuts, it failed to effectively curb the crisis spread. The roots of this crisis can be traced back to the successive bursts of the internet bubble and the real estate bubble, which had a profound recession impact on the economy.
Whether the current rate cut policy will repeat history, triggering the burst of bubbles such as the artificial intelligence bubble or the US debt crisis, and thus dragging down the crypto market, remains to be seen.
In the short term, however, the global central banks’ rate-cutting spree, led by the Federal Reserve, is undoubtedly a strong stimulant for global financial markets and the crypto market. Undoubtedly, the expectation of rate cuts will directly increase market liquidity, triggering market optimism and potentially leading to a short-term surge in the cryptocurrency market, offering investors quick profit opportunities.
In the long term, the cryptocurrency market’s trend will be influenced by more complex and variable factors, and price fluctuations are not driven by a single factor. A comprehensive analysis is required:
First, the market trend mainly depends on the strength of economic recovery. If rate cuts can stimulate economic growth, the cryptocurrency market might benefit. Conversely, if economic recovery is weak, market confidence will diminish, affecting cryptocurrencies. During the 2020 COVID-19 pandemic, Bitcoin experienced a crash similar to the stock market and commodities on March 12. Markus Thielen of 10x Research recently pointed out that the US economy is weaker than the Federal Reserve initially expected. If the stock market follows the ISM Manufacturing Index’s decline, Bitcoin prices might continue to drop, and in times of economic downturn, investors might sell Bitcoin.
Secondly, inflation factors must be considered. Central banks cut rates to stimulate the economy and promote consumption, but this might also lead to inflation risks. Rising inflation, in turn, might cause central banks to raise rates, adding new pressure on the crypto market.
Thirdly, the US presidential election and global regulatory changes also have far-reaching impacts. Who will be the next US president? What policies will the new president adopt towards cryptocurrencies?
In conclusion, the global central banks’ rate-cutting spree undoubtedly brings new opportunities and challenges to the crypto market. In the short term, rate cuts are likely to provide liquidity support for crypto assets, including factors such as increased liquidity and heightened demand for safe-haven assets. However, it also faces historical financial crisis lessons and other complex factors’ challenges, making it temporarily difficult to ensure definite benefits for crypto development.
03. Future Market Trends
As we all know, the trend in the crypto market is influenced by short-term buy-sell comparisons and macro fluctuations and by monetary policy in the long term.
In the short term, the US and Japanese markets are in a key period of policy fluctuations. Galaxy CEO Mike Novogratz stated on the X platform that the Bank of Japan’s rate hike triggered global risk aversion.
If the US economy falls into recession, the impact on the crypto market has already been demonstrated by the “312” crash in 2020. What will the 2024 market look like? 10x Research analyst Markus Thielen pointed out: It is evident that the US economy has been weaker than the Federal Reserve initially thought over the past 48 hours. The weak ISM index has impacted risk assets. The Federal Reserve’s hint of a rate cut in the fall cannot prevent economic decline. If the stock market follows the ISM Manufacturing Index’s downward trend and begins to anticipate an upcoming recession, stocks might plummet significantly in the coming quarters. If this happens, Bitcoin might suffer a major sell-off, with prices possibly falling below $50,000, or even lower.
Mizuho Securities senior analyst Dan Dolev stated: Bitcoin is not yet the safe-haven tool people hope for. If unemployment rises and people lose their jobs, investors will have to liquidate their tokens. This also means that Bitcoin may face another downturn risk.
Crypto Utopia believes that in the long run, as the Federal Reserve begins to cut rates, the US will start a new round of monetary easing. With more US dollars entering the capital market, it is believed that the crypto market will also rise. Even if the US economy truly enters a recession, the US government’s ultimate choice might only be further monetary easing.
Therefore, a reasonable conclusion might be that the short-term is unpredictable, but the long-term is bullish.
What’s more, in today’s complex and ever-changing financial market, individual investors face numerous challenges and uncertainties. Instead of taking risks with self-directed investments, it is wiser to entrust your funds to professional quantitative funds for management. Quantitative funds use advanced mathematical models and algorithms to capture market opportunities, optimize investment portfolios, reduce risks, and achieve more stable returns.
