In a video released on June 22, crypto analyst Lark Davis delves into a critical question for cryptocurrency investors: What will happen to Bitcoin’s price when the Federal Reserve eventually cuts interest rates?
Lark Davis begins by examining the history of rate cuts and their effects on financial markets. Davis notes that over the past 50 years, the US has undergone seven rate cut cycles, typically lasting around 26 months each. According to Davis, stock markets generally perform well during these cycles if the economy remains robust. Davis explains that increased spending during these times boosts corporate profits, leading to higher stock prices. Conversely, Davis points out that if a rate cut cycle coincides with a recession, the stock market tends to suffer as the economy struggles despite lower interest rates.
Lark Davis highlights that different asset classes respond uniquely to interest rate changes. Davis mentions that bonds often outperform during rate cuts, while stocks and real estate typically benefit in the long term. According to Davis, growth stocks, in particular, thrive during periods of rate cuts after struggling with higher borrowing costs during rate hikes. Davis explains that lower rates make it cheaper for companies to borrow and expand, which can sustain high stock valuations if the economy continues to grow and inflation decreases.
Despite many analysts predicting a recession in 2024, Lark Davis points out that current indicators suggest otherwise. Davis cites Bankrate, noting that the chances of a recession in the USA have decreased to 33%, down from previous estimates. However, Davis warns that if the FED maintains higher rates for too long, it could inadvertently push the economy into a recession, necessitating aggressive rate cuts to mitigate the downturn.
Lark Davis explains that central banks in other countries, such as Canada and the European Central Bank, have already begun lowering rates, yet the US remains hesitant due to lingering inflation concerns. According to Davis, the FED has kept rates between 5.25% and 5.5%, waiting for further economic stabilization before making any significant moves.
Lark Davis notes that Bitcoin’s price trajectory is closely tied to global money supply and market liquidity. Davis mentions that the global M2 money supply has reached a new high of $94 trillion, indicating increased liquidity, which bodes well for Bitcoin. Historically, Davis explains, Bitcoin has performed well during periods of rising liquidity and falling interest rates. Davis suggests that the potential for Fed rate cuts could signal a major bullish phase for Bitcoin, possibly leading to new all-time highs by 2025.
Lark Davis highlights the growing demand for spot Bitcoin ETFs, which he says have been accumulating Bitcoin at a rapid pace, further tightening supply and potentially driving prices higher. Davis points out that in the first week of June, US-based spot Bitcoin ETFs accumulated more Bitcoin than the total number of new Bitcoins created by miners. Davis suggests that this trend could result in significant price increases if demand continues to outstrip supply, as predicted.
Lark Davis explains that the timings would place a supply shock on the calendar for around January 2025, right as the Fed’s rate cuts would be kicking in big time. While the immediate reaction of Bitcoin to the expected upcoming rate cuts remains uncertain, Davis notes that the overall trend points towards a positive outcome for Bitcoin prices. Davis highlights that markets often react and overreact to such events, but the long-term outlook appears bullish.
Lark Davis emphasizes that while the immediate reaction of Bitcoin to the expected Fed rate cuts remains uncertain, the overall trend points towards a positive outcome for Bitcoin prices. Davis suggests that as long as there are no unforeseen economic shocks, Bitcoin investors can expect favorable market conditions in the coming years. Davis advises that staying informed and strategically positioned will be crucial for capitalizing on these potential gains.