The upcoming Fed meeting on the 30-31st July has investors and the crypto community on the edge of their seats about the Fed interest rate-cuts in September and its direct impact on cryptocurrencies like Bitcoin.
In 2024, we face potential rate cuts, with the inflation rate slowing down to 3% compared to last year’s 9%. Understanding the Fed’s moves for retail and their impact is crucial, especially in the volatile markets of cryptocurrencies. Even more so now that the Crypto community is expecting the bull run to be kick-started by the very first rate cut!
The Fed’s Tool
The Federal Reserve (Fed) is the central banking system of the United States. It is responsible for implementing monetary policies, regulating banks, and ensuring general financial stability.
Interest rates, specifically the federal funds rate, are the Fed’s primary mechanism for regulating the economy. By raising or lowering this rate, the Fed can influence everything from borrowing costs to consumer spending and business investment.
Historically, the Fed’s decisions have been the centre of navigating economic cycles which have consisted of market booms, recessions and inflations but its main aim has always been to maintain the intricate balance between Maximum employment and a stable level of inflation.
Historical Snapshot
During 2017-18, the Fed’s interest rate hikes coincided with a significant drop in Bitcoin’s price. From a high of nearly $20,000 in December 2017, Bitcoin dropped to around $3,200 by December of 2018, this was caused by the tightening monetary policy and a relatively stronger dollar.
In 2020, the Fed cut down interest rates to near zero in response to the COVID-19 pandemic which resulted in a surge in Bitcoin and other digital assets. Bitcoin reached a new all-time high in the following months of around $29,000.
Then the Fed started introducing a rapid series of interest rate hikes, starting in early 2022. This led to a substantial decline in Bitcoin and other cryptocurrencies. As interest rates increased, the cost of capital rose, prompting investors to shift towards more stable assets and causing significant sell-offs in the crypto market.
A Pause Before Potential Cuts
The Reserve has recently opted to maintain the rate at 5.25-5.50%. Many speculate that this decision reflects a cautious approach amidst mixed economic signals.
Analysts now anticipate that the Fed will begin cutting rates by September 2024 as the latest consumer price index (CPI) report showed inflation dropping to negative values in June (-0.1%) from May (0.0%). According to the CME FedWatch tool, the probability for September cuts is almost 89% and there’s an increased probability for consequent cuts in November and December.
The current pause in the Fed’s rates follows a series of aggressive rate hikes initiated during March 2022, that aimed to curb soaring inflation which peaked at over 9% last year. On the other hand it has led to Bitcoin surging from the 2022 lows of $15,000 to its ATH this year at $73,000.
“In general, high interest rates scare investors away from riskier investments like crypto, and the lowering of rates will be seen as a positive by the crypto investor community.” says Dan Raju, CEO of Tradier which is a brokerage platform.
While riskier assets like cryptocurrencies had plummeted in 2022, the rate hikes had had an opposite effect on another safer asset class which consisted of oil and other commodities. But those effects remained short lived and by 2023, both Crypto Currencies and commodities had stabilised.
The Broader Market Impact: Stocks and Commodities
The ripple effect of the Fed’s rate decisions extends way beyond cryptocurrencies. Stock markets have also shown significant drawdowns, time and again, following the onset of rate cut cycles. This has taken place especially when those cuts are driven by economic weaknesses.
For instance, past instances of rate reductions have often been accompanied by stock market declines as investors reassess risks and economic forecasts.
Commodities like oil also react to Fed policies. In recent years, oil prices have stabilised around $70-$80 per barrel, reflecting a balance between supply constraints and market expectations of lower rates. The anticipation of rate cuts has helped prevent a substantial decline in prices, despite global supply dynamics.
The Crypto Connection: Bitcoin and Fed Policies
Cryptocurrencies, especially Bitcoin, have shown sensitivity when it comes to Fed rate decisions. Historically, Bitcoin thrived during periods of Fed rate pauses.
“During the Fed’s pause from rate hikes until July 2019, bitcoin experienced explosive growth, returning +169%. Following a seven-month pause in 2019, the Fed cut interest rates, initiating a steep rate-cutting cycle. Initially, bitcoin responded positively, rallying +19% within a week after the July 31, 2019, rate cut. However, two weeks later, Bitcoin was back to flat,” Thielen said.
Early this year, Bitcoin soared to record highs ($73,000), driven by the anticipation of rate cuts.
It was in November 2021 that retail realised that the central bank was serious about calibrating monetary policies and that was when cryptocurrencies and other riskier assets peaked.
Cryptocurrency prices struggled ever since the Fed announced in November 2021 to raise rates and throughout 2022 as they followed up on their decision. But now with the introduction of Bitcoin ETFs, which caused the price of BTC to reach an ATH in March, the potential inflows due to Ethereum ETF and the upcoming prospect of lowering interest rates, Cryptocurrency prices are speculated to be highly bullish assets!
With the latest announcement made by Jerome Powell, Fed Chairman, about how the they will not be waiting for inflation to reach 2% before they start rate cuts, being made very recently, crypto markets have already started showing impact:
- Dogwifhat(WIF) and Floki(FLOKI) jumped more than 20% in the part 24 hrs
- Bitcoin reached a one-month high (this month) at $67k+.
Bullish for Investors?
When interest rates are involved, it introduces a highly volatile factor in the case of investors. All asset classes, whether cryptocurrencies or safer ones like commodities are affected and the market becomes unpredictable.
So it is said that the best strategy for investors during such times is to diversify their investments and stick to a long-term plan rather than taking chances and making paper decisions.
Lowered interest rates do make riskier assets more appealing for investors who look for a high ROI, thus leading to an increased demand for ETFs (stock or crypto).
The Road Ahead
However, the real test lies ahead: if the Fed’s cuts are a response to standing strong economic health, Bitcoin could see continued growth. But if cuts are in response to economic fragility, risk aversion might arise towards cryptocurrencies like Bitcoin and drive investors towards safer assets like government bonds.
Although, at the moment, it is noticed that the general sentiment of people going for safer assets is somewhat short.
Understanding the Fed’s interest rate policies and their broader implications is essential for navigating today’s complex investment landscape. The interplay between Fed decisions, economic health, and market sentiment will continue to shape the financial landscape, making informed decision-making more important than ever.
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