Investors await the Federal Reserve’s decision on interest rates this Wednesday, but some warn that too dramatic a cut will harm risk-on assets like Bitcoin.

Lower interest rates are usually seen as a boon to risk-on assets like cryptocurrencies. Counterintuitively, however, a more aggressive cut may be bad for Bitcoin’s price.

Why? Because it suggests that the economy is in worse shape than people think, Shannon Saccocia, chief investment officer at Neuberger Berman Private Wealth, told MarketWatch.

“If the Fed signals deeper concerns about the economy, market participants may retreat from assets that they perceive as risky, including Bitcoin,” Dave Birnbaum, VP of product & marketing at Coinbits, wrote for Forbes.

The Chicago Mercantile Exchange’s FedWatch tool currently shows a 59% probability of a 25 basis point cut, and 41% for a larger 50 basis point reduction.

Data from RIA analyst Michael Lebowitz shows that markets have historically underestimated the scale of the Fed’s rate cuts during easing cycles. In the 2000-2003 and 2007-2009 periods, the market misjudged the Fed’s cuts. This indicates that expecting a 25 basis point cut may be too conservative.

Investor confidence

Crypto investors hope new rate cuts will boost demand for riskier assets like Bitcoin. They have reason to be bullish.

Historical data shows that Bitcoin’s price often rallies when the Fed loosens monetary policy.

In October 2019, the Fed made three consecutive 25 basis point cuts, which Jerome Powell called a “mid-cycle adjustment.”

While the onset of the Covid-19 pandemic initially drove Bitcoin to a long-term low in March 2020, the price eventually climbed 1,300% to top $60,000 for the first time.

Investor confidence already appears to be rising ahead of the Fed’s meeting.

Digital asset investment products saw inflows of $436 million last week, following outflows totalling $1.2 billion in the two weeks before that, according to the latest CoinShares data.

The surge in inflows “was driven by a significant shift in market expectations for a potential 50 basis point interest rate cut,” CoinShares analyst James Butterfill wrote.

Crypto market movers

  • Bitcoin is down 2% over the past 24 hours to trade at $58,768.

  • Ethereum is don 4% to trade at $2,311.

What we are reading

  • Sam Bankman-Fried appeals, alleges judicial bias in FTX case: ‘thumb on scale for prosecution — DL News

  • Sky Proposes Full Offboarding Of Wrapped Bitcoin Due To Justin Sun Controversy — Milk Road

  • SEC Surprisingly Details Exemptions From SAB 121, Further Muddying the Waters — Unchained

  • MicroStrategy Buys 18,300 $BTC, Boosts Holdings To 244,800 — Milk Road

  • Binance responds to growing Clipper malware crisis with blacklist and safety measures — DL News

Kyle Baird is a Weekend Editor at DL News. Got a tip? Email at kbaird@dlnews.com.