What will happen to Bitcoin prices if the Fed cuts interest rates?

Multiple market players now expect the Federal Reserve to cut rates during the summer. The interplay between the Federal Reserve and monetary policy for Bitcoin BTC has been an interesting one, and one that goes much deeper than just the “inflationary hedge” narrative. How can Bitcoin be affected by changes in the rate environment?

In the past, Bitcoin has shown a correlated relationship with stock markets – showing negative price response to rates rising in response to inflation, along with stocks. Since March, 16th, 2022, the Federal Reserve has moved away from zero interest rate policy. Throughout 2022 and 2023, the Fed rapidly increased the target band for the policy interest rate until by July 23, 2023 the rate was at its current 5.25% – 5.50% range. During that period, Bitcoin would trade in a depressed range relative to its highs, although it gradually broke out from a low of around ~15k after the FTX news to a tepid recovery of around 30k during the last of the Fed’s interest rate hikes broke out. .

Bitcoin has only ever really scaled back in the shadow of zero interest rate policy and small interest rate hikes ahead of the 2022 rush to tame inflation. COVID-19 and the resulting panic ensured that interest rate targets would remain around zero throughout the acute stages of the pandemic – giving Bitcoin room to continue growing in the low-rate environment it was accustomed to, even though there was a failed attempt to raise interest rates again before the pandemic. When we wrote about it at the time, the conclusion of short-term price volatility was leaning to the downside, but longer-term potential appears to be true.

There are always many factors that go into Bitcoin prices: normally, major events such as state adoption, the approval of ETFs, bans on nation states, and failures of exchanges or third-party custodians play into the mix. There is also always the tension between supply and demand – as a peer-to-peer market, there is not necessarily any external force supporting the system. There may be larger buyers such as countries and publicly traded American corporations, but they are not tied to Bitcoin beyond believing its mechanics and reliability.

This is the opposite of fiat world: where the ECB, for example, is buying up a large amount of European sovereign debt – in 2022, an estimate of “only 40%” eurozone sovereign debt. In fiat world there are many forced buyers but few forced sellers. In Bitcoin it’s the opposite – no one has a mandate to buy Bitcoin, but there have been bankruptcies of leveraged services like Celsius and BlockFi that have forced them to be sellers – and which may be the reason behind some of the ETF outflows and ‘ some balancing of downward pressure on the Bitcoin price.

If the Fed lowers rates, it will play into this existing supply/demand dynamic. The Fed is also likely to set an example for central banks around the world. Targeting debt purchases and lower interest rates from central banks will be designed to get people to buy into leverage and debt. Risk assets such as stocks may thrive, although the AI ​​hype driving them may at some point meet its finite end given the amount of revenue generated versus the amount invested in infrastructure (still the market may be “irrational” longer if you can naturally stay liquid). Bitcoin is also likely to rise, given its correlated history with stocks. It could also give people an easier way to switch in and out of stocks now that ETFs are mainstream, so perhaps the correlation with stocks and booming tech stocks could develop even stronger.

With Bitcoin, there is a lot of volatility that is driven by the system itself. There will be the results of the halving – with higher prices normally expected 6-18 months after the halving itself if history repeats itself (hardly a reliable guide for Bitcoin, but perhaps a directional lens). Then there are always time bombs – and unexpected windfalls. Maybe an exchange or two or a leveraged service could fail. Despite what models may say about a power law, or a law of nature that makes Bitcoin deterministic, the markets certainly work in a way that often defies precise prediction.

Still, the potential for multiple rate cuts could create a favorable environment for price — and perhaps provide a different price range than the current environment of rapid rate hikes, and multiple ETF approvals that are driving most of the price action. In the short term, lowering rates is likely to help all risk assets, including Bitcoin. In the long run, it will also contrast and compare Bitcoin’s model with the fiat model – with central banks tending to lower rates and inflate money supply at the first sign of real economic trouble – proving why a rare, distributed money rather than being arbitrary. diktats in the service of the few will be beneficial to the many.