Fed cuts rates: what is the impact on Bitcoin and the crypto market?

All indications are that the latest data on the US economy have paved the way for the Federal Reserve (Fed) begins to cut interest rates, with the first move at its meeting next week (which will be on September 18). The central bank will lower yields by 25 basis points at each of the three remaining monetary policy meetings through 2024, According to the latest Reuters poll of economists, the question that arises in this context is what is the impact on the economy? Bitcoin.

There are precedents that could shed light on what is coming for the crypto market. First of all, it is worth mentioning that Bitcoin is showing signs of recovery after some investors entered strongly following the latest falls, as it advanced from the level of US$52,546 to above US$56,000.

Although the resistance at this level is a hurdle, a break above this value could trigger a marked bullish momentum and flirt with the $58,000 mark. On the downside, the $56,500 area serves as an immediate support.

Bitcoin’s reaction to a rate cut

The last time the Fed cut interest rates was in March 2020. On that occasion, it was reduced from the range of 1.50% to 1.75% to 0% to 0.25% in response to the economic crisis caused by the COVID-19 pandemic. This was a drastic measure to stimulate the economy at a time of uncertainty. Since then, the US central bank kept rates low until it began to raise them in 2022 and marked the beginning of a more restrictive monetary policy.

In dialogue with Scope, Iñaki Apezteguiachief research officer of Crossing Capitalremember that the Fed’s interest rate cut in March 2020 had a significant impact on the price of Bitcoin. At that time, the price of the largest coin by “marketcap” was around $8,000 and, after the rate cut and the increase in liquidity in the marketthe cryptocurrency experienced a notable increase and, in fact, marked an all-time high of around US$68,000 by November 2021.

“This increase was attributed to the injection of capital into the economy and the increased interest of institutional investors in Bitcoinwhich created a favorable environment for its growth,” says Apezteguia. The relationship between monetary policy and the price of Bitcoin became more evident, he says, as the cryptocurrency shows a sensitive behavior to changes in interest rates and market liquidity, the expert indicates.

This look coincides with that of Vivien Linchief product officer of BingXwho points out that both Bitcoin and the crypto market in general tend to react positively in the face of a possible rate cut by the Fed.

Lin explains that this typically creates a positive outlook for cryptocurrencies in the short to medium term due to increased liquidity and risk sentiment, in line with what Apezteguia has said. However, the expert warns that the exact reaction will depend on the broader macroeconomic environment.

It turns out that lower interest rates could devalue fiat currencies, which would reinforce the narrative of Bitcoin as a store of value or hedge against inflation. In that context, for Lin, investors could see Bitcoin as a possible investment with which to diversify when fiduciary values ​​begin to weaken, which would increase its attractiveness. But he remembers that “it is always essential to understand that prices can be more volatile as traders adjust to the newssince, over the years, prices have skyrocketed when there is an expectation of greater liquidity.”

Bitcoin: So what to expect after December 18?

As Apezteguia explains, most analysts anticipate that the Fed could begin to reduce rates, possibly by 25 or 50 basis points, in response to the moderation of inflation and the cooling of the labor market. And the consensus among market operators suggests that there is a 55% probability of a 50 basis point cut, while a more conservative 25 basis point cut is also likely. For the strategist, this move could mark the end of an era of aggressive rate hikes that began in 2022 and is expected to ease access to loans for consumers and businesses.

Finally, Lin explains that investors are also turning to other assets such as stablecoins as yields rise in crypto-based lending environments and decline in fiat-based lending. He therefore argues that rate cuts They are an interesting phenomenon that can positively affect short- and medium-term conditions for the crypto market.

In this way, past data shows that the start of the rate cut cycle, beyond the size of the first move, does not always have a stimulating effect on asset prices. One fact that cannot be overlooked is that the long-awaited easing by the Fed is one of the key factors behind BTC’s bullish trend since the $20,000 it marked in January 2023, which raises the question of whether the rate cut is already priced in.