The impact of the Fed’s rate cut on the crypto market: Don’t have too high expectations for rate cuts

Author: Daoshuo Blockchain

The much-anticipated interest rate cut by the Federal Reserve has finally landed. This time, not only did the interest rate cut, but the extent of the cut exceeded many people's expectations. It was not 25 basis points but 50 basis points.

Therefore, the articles on the impact of the interest rate cut on the Internet have been discussed more heatedly.

Regarding the interest rate cut, in this recent online exchange, I shared a little more than in the past. My views can be summarized as follows:

After this period of study and sorting, I tend to think that for the crypto ecosystem, we should not take the impact of the interest rate cut too seriously, especially not to deviate from the focus and focus. The focus and focus of the crypto ecosystem are still innovation and invention within the ecosystem. The easing of the external environment is icing on the cake, but it is not timely help.

So I haven't paid much attention to the news about interest rate cuts before. However, among the many online articles, I still found some views worth sharing.

A domestic securities firm has issued a research report on this interest rate cut, which summarizes the impact of the Fed's interest rate cuts on US stocks, gold, A shares and the RMB exchange rate in history.

The Fed's interest rate cuts can be roughly divided into two categories: bailout-style interest rate cuts and preventive interest rate cuts.

The so-called bailout-style interest rate cuts are mainly triggered by interest rate cuts in response to certain unexpected conditions or emergencies, with the purpose of saving the market and preventing the situation from getting worse. For example, the bursting of the Internet bubble in 2001, the subprime mortgage crisis in 2008, and the epidemic in 2020.

The preventive interest rate cuts are mainly triggered by interest rate cuts to prevent possible declines or recessions, with the purpose of stabilizing the economy and employment. For example, this time's interest rate cut.

Relief-style interest rate cuts are generally larger in magnitude and more frequent; preventive-style interest rate cuts are relatively smaller in magnitude and less frequent.

Since 1982, the Federal Reserve has made a total of five preventive interest rate cuts. Except for the one in 1987, the other four interest rate cuts were only three times, and the total magnitude did not exceed 81 basis points.

Since 1982, among the total of 9 interest rate cuts (including 4 bailout-style interest rate cuts and 5 preventive-style interest rate cuts),

the probability of US stocks rising is more than 60%;

the probability of gold rising is close to 60%;

the probability of A-shares rising is less than 50%;

the renminbi has only risen once, and the others have either remained unchanged or fallen.

The above are the main results shown in this research report.

Dig into the data of this research report carefully, we can find some additional information:

In the past five preventive rate cuts, except for the one in 1987, the highest rate cut was only 81 basis points. This preventive rate cut has dropped by 50 basis points. Based on past historical data, I guess that the Fed will not continue to cut interest rates by too much in the future.

If this guess happens to be right, then when the rate cut is completed in the future, the US interest rate will still be high and still lead the interest rates of major currencies in the world. This will bring huge pressure to other countries in the long run, resulting in the possibility that US dollar assets will still be very attractive assets.

In addition, if the total amplitude of this round of rate cuts is not large, then the water it can release will not be much. Therefore, it is probably unrealistic to expect the next financial assets (including crypto assets) to rely on the Fed's release of water to blow up a big bubble.

The interest rate cut has certainly provided a loose funding environment for all financial assets, but will funds definitely flow into all financial assets?

I think the key is to see whether a certain type of financial asset has room and potential for future growth in the eyes of investors. If there is potential, funds will most likely flow in; if there is no potential, then no matter how low the price is, funds may not flow in.

From this point of view, let's look at crypto assets. The key is whether it has room and potential for future growth in the eyes of investors (especially big funds).

So what is the key to judging whether crypto assets have room and potential for future growth?

Especially when crypto assets still face competition from US stocks, I think the only thing is whether new applications and ecosystems can emerge in the crypto ecosystem.

If there is still no application innovation like now, then at most the US stock market will eat meat and crypto assets will drink soup.

In short, I still think that from the perspective of crypto assets, we should not have unrealistic and high expectations for the Fed's interest rate cuts.