After 14 months of federal interest rates in the 5.25% to 5.5% range, the Federal Reserve is finally ready to bring them down.
The US central bank will announce the magnitude of the cut Wednesday afternoon during the Federal Open Market Committee meeting. The market is assigning 65% odds of a 0.5% cut, and a 35% chance of a standard 0.25% move.
For crypto, a rate reduction is good news.
High interest rates incentivize investors to park their money in risk-free Treasury bonds to earn an attractive yield.
Lower rates, meanwhile, force investors to hunt for returns in risk-on assets like tech stocks and cryptocurrencies.
But will some coins outperform others?
Bitcoin
Rate cuts will likely benefit Bitcoin for a few different reasons. The first: Bitcoin is particularly sensitive to new money flooding the financial system.
“Bitcoin’s price has shown a strong positive correlation with global liquidity since its inception,” Brian Rudick, director of research at crypto trading firm GSR, told DL News.
There’s also the fact that Bitcoin’s hard cap on supply makes it a digital equivalent to gold in the eyes of many investors.
And inflation may soon come roaring back as the Fed proceeds further with additional rate cuts. FedWatch data shows traders give 60% odds that rates will be lowered by at least 1.25% by December.
“I remain convinced that the next shock will be inflationary, because the underlying conditions have not changed,” Vincent Deluard, director of global macro for financial services company StoneX, posted on X.
“If anything, the Covid experience probably set precedents for future policy decisions,” Deluard added. “Financial repression saved the US, European, and Japanese governments $8 trillion in the past decade: why would governments and central banks stop here?”
Government spending and inflation will likely bolster both Bitcoin and gold, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News.
“I do think inflation will become problematic again, and that will ultimately be the reason the Fed stops cutting,” Thompson said. “But based on their last hiking cycle, they waited as long as possible to raise rates again because of inflation.”
Ethereum and Solana
It’s harder to predict what will happen to the rest of the crypto ecosystem.
As the biggest cryptocurrency in value, Bitcoin is the pack leader. If Bitcoin goes up, other cryptocurrencies surge — and if it goes down, they plunge.
In that sense, what’s good for Bitcoin is almost certainly bound to be better for Ethereum and Solana.
“Barring token-specific drivers, the majors will likely move in line with their beta, with Solana moving the most, followed by Ethereum, and then Bitcoin,” Rudick said.
But Thompson noted a big difference between the three currencies: Bitcoin and Ethereum now have US spot exchange-traded funds, while Solana does not. And Ethereum has not seen the same kind of demand for its ETFs as Bitcoin.
“The marginal buyer of crypto right now is an ETF buyer, right?” Thompson said. “ETF inflows are negative for Ethereum and positive for Bitcoin, and that’s been the number one driver of capital into the sector all year.”
“It’s a lot easier to long riskier assets in high momentum time periods than it is when everything is struggling to just hang on,” Thompson said.
In other words, the Fed rate cuts will likely end up boosting Ethereum and Solana — but only if Bitcoin can maintain enough of an uptrend for the market to heat up again.
Tom Carreras writes about markets for DL News. Got a tip about Bitcoin and the Federal Reserve? Reach out at tcarreras@dlnews.com
