Why the Fed’s rate cut may not be as good for Bitcoin as expected

Author: Omkar Godbole, CoinDesk; Compiler: Deng Tong, Golden Finance

• Last Thursday’s inflation report may have set the stage for the Federal Reserve to start cutting interest rates this year.

• While the crypto community expects the first rate cut to spark a bitcoin bull run, the reaction depends on the context of the central bank’s easing.

Following yesterday’s inflation report, it seems increasingly likely that the Federal Reserve (Fed) will start cutting interest rates this year, satisfying crypto bulls’ long-standing desire for a more risk-tolerant macroeconomic environment.

The consensus in the crypto market community is that rate cuts, likely to begin in September, will increase fiat liquidity, catalyzing demand for riskier investments such as Bitcoin (BTC).

While this makes sense, the market may have already priced in any easing. Expectations of rate cuts have dominated crypto and traditional market sentiment since the second half of 2022 and were one of the key catalysts for Bitcoin's surge from its 2022 lows near $15,000 to an all-time high of over $73,000 this year. Therefore, an actual rate cut may only elicit a lukewarm reaction from the market.

What may be more important is the context in which the rate cut occurs.

If rate cuts occur during a period of low inflation and economic prosperity, the stimulus to asset prices may be more obvious. Rate cuts amid signs of economic fragility could send a negative signal, prompting investors to move money from riskier assets to safer assets such as government bonds.

"If the Fed cuts rates in September 2024 solely on inflation concerns, this could be a short-term positive for Bitcoin," Markus Thielen, founder of 10x Research, said in a report shared with CoinDesk. "However, if economic growth concerns drive rate cuts, whether in September or later, Bitcoin could face significant selling pressure."

Thielen said that historically, Bitcoin has seen the biggest gains when the Fed pauses its rate hike cycle. The first rate cut typically elicits a tepid reaction.

"During the Fed's pause in rate hikes until July 2019, Bitcoin experienced explosive growth, returning +169%. After a seven-month pause in 2019, the Fed cut rates, kicking off a sharp rate-cutting cycle. Initially, Bitcoin reacted positively, rising +19% in the week following the July 31, 2019 rate cut. However, two weeks later, Bitcoin was back to flat," said Thielen.

Thielen added that rate cuts in the second half of 2019 were due to economic uncertainty and dragged down BTC's price. The cryptocurrency's price fell 33% in the second half of the year, CoinDesk data shows.

The U.S. stock market exhibited a similar pattern.

“The arrival of a Fed rate-cutting cycle tends to coincide with a significant decline in the stock market,” Austin Pickle, a strategist at Wells Fargo Investment Institute, said last month, as reported by MarketWatch. “Since 1974, the stock market has fallen by an average of about 20% within 250 days of the Fed’s first rate cut.”

Pickle added that if the Fed is forced to cut rates in response to macro weakness, the stock market will suffer.

This means that cryptocurrency traders should be alert to signs of weakness in the U.S. economy.

The U.S. economy was in the late stages of expansion at the end of the second quarter, according to Fidelity’s business cycle tracker. Leading indicators such as new orders for consumer goods and materials, consumer confidence and building permits point to future weakness. Rate cuts will do little to help risk assets, including BTC, if weakness becomes more pronounced in the coming months.