In recent years, the impact of U.S. monetary policy on global financial markets has become increasingly significant. Among them, the Federal Reserve's interest rate cuts are usually seen as a signal to release liquidity, triggering market expectations for rising asset prices. However, focusing on the crypto market, will interest rate cuts definitely push up cryptocurrency prices? 35 years of review data may reveal a "thorny" truth.

Fed cuts rates

At present, the global economic landscape has undergone profound changes. The monetary policy adjustments of central banks, supply chain disruptions, and the continued rise in inflation have greatly affected the turbulence in the financial market, especially the cryptocurrency market. In this environment, people began to seek a good solution and called on the Federal Reserve (Fed) to cut interest rates to save the market. As the central bank of the United States, the Fed has a huge influence on the financial market. When the Fed cuts interest rates, the US dollar deposit interest rate falls, capital flows out of banks and flows to other countries, promoting global investment and economic recovery.

The Fed's monetary policy adjustments, including interest rate cuts, mainly affect the economy by adjusting market liquidity. The direct consequence of interest rate cuts is a reduction in borrowing costs, which increases the supply of funds in the market. In theory, this loose monetary policy helps stimulate economic growth and asset price increases.

In reality, since cryptocurrencies are considered high-risk assets, the increase in liquidity brought about by interest rate cuts usually increases investors' risk appetite, thereby supporting crypto assets such as Bitcoin. After the interest rate cut, there is more disposable funds in the market, and investors are more inclined to enter the risky market with high returns, and the cryptocurrency market naturally becomes an option.

At the same time, interest rate cuts are often accompanied by a weakening of the US dollar, and cryptocurrencies, as a decentralized asset class, are seen as a tool to hedge against the depreciation of the US dollar, attracting more capital inflows. In a low-interest environment, the yields of traditional assets have declined, and investors are forced to look for higher-yielding investment targets. Cryptocurrencies have become the favorite of some investors due to their high volatility. However, these logics seem reasonable, but historical data show the different effects of interest rate cuts on cryptocurrencies.

35-year interest rate cut review

Interest rate cuts are aimed at responding to economic recession and inflation, but asset price rebounds are often accompanied by a lag effect, and economic uncertainty may lead to increased risk aversion among investors, which in turn suppresses high-risk assets such as cryptocurrencies. This means that interest rate cuts do not necessarily mean an immediate rise in risk markets, but rather a decline in most cases.

In the 1980s and 1990s, the Federal Reserve cut interest rates in response to economic recession and inflation, but the effect was not always as expected. Even if liquidity is injected into the market, it often takes time for asset prices to rebound. In some cases, economic uncertainty has led to an increase in investor risk aversion, and funds have flowed into low-risk assets, which has suppressed high-risk cryptocurrencies.

During the 2008 financial crisis, the Fed’s interest rate cuts and quantitative easing policies did benefit asset prices, including stocks and Bitcoin, in the long run. However, this cycle also exposed a problem: when market sentiment is unstable and panic spreads, the benefits of interest rate cuts are easily overshadowed by negative macroeconomic factors, and the price of cryptocurrencies is suppressed instead.

When the epidemic broke out in 2020, the Federal Reserve quickly cut interest rates to near zero and printed money on a large scale. This move did provide strong support for cryptocurrencies such as Bitcoin, and the crypto market experienced a historic bull market. This rise was driven more by market sentiment and hedging inflation expectations, rather than just the impact of the interest rate cut itself.

By reviewing the US interest rate cycle over the past 35 years, we can find that interest rate cuts are not a universal catalyst for price increases and are not always beneficial to cryptocurrencies or other high-risk assets. Therefore, from a historical perspective, interest rate cuts are unlikely to be the fundamental driving force behind the rise of Bitcoin and the crypto market.

Risk factors for rate cuts

In the current reality, the Fed's monetary policy adjustment has a far-reaching impact on the global financial market, but the measures of cutting interest rates to stimulate economic growth through crazy money printing are also accompanied by a series of potential risks. When the economic outlook deteriorates, market confidence is insufficient, investors will tend to choose a more stable asset allocation, and the high-risk cryptocurrency market may encounter selling pressure.

Secondly, the Fed’s policies are not set in stone. When the market expects that interest rates may rise or monetary policy may be tightened in the future, asset prices may react in advance and adjust. In such cases, the short-term benefits of interest rate cuts are easily offset by the uncertainty of policy expectations. At the same time, historical data shows that in the early stages of interest rate cuts, the market often has an adaptation period. During this period, asset prices may fluctuate violently, and cryptocurrencies, as highly volatile assets, are more difficult to predict.

Although cryptocurrencies are seen as a hedge against inflation, the cost of living pressures brought about by high inflation may cause investors to reduce their risk exposure, thereby suppressing the upward momentum of the crypto market. Therefore, the complex economic environment behind the rate cut often leads to multiple risks, which may offset the benefits of the rate cut and even lead to reverse market fluctuations. Since 2024, we have experienced events such as Bitcoin spot ETFs and halving. The market needs the next grand narrative or fundamental change.

in conclusion

The impact of the Fed's interest rate cut policy on the cryptocurrency market is complex and multifaceted. Although interest rate cuts can increase market liquidity, improve investors' risk appetite, and may support cryptocurrency prices, historical data tells us that this impact is not one-way. In the case of poor economic fundamentals, increased policy uncertainty, or increased inflationary pressure, the cryptocurrency market may show the opposite trend.

Therefore, for investors, it is more important to understand the deep-seated impact of interest rate cuts on the market than simply judging market sentiment. Interest rate cuts and money printing do not necessarily mean that asset prices will rise, but require a comprehensive assessment of multiple factors such as the economic environment, market sentiment, and policy expectations. This also reminds us that we need to remain calm and cautious when investing in cryptocurrencies and avoid being swayed by a single market expectation. Only thorough analysis can keep us invincible in the ever-changing market.