The short-term impact of this interest rate cut on cryptocurrency, especially in the current complex global economic environment, may bring about the following significant changes:
Liquidity increases, funds flow into the crypto market: interest rate cuts mean lower yields in traditional financial markets, investors may seek higher-yielding assets, and the cryptocurrency market becomes one of the targets of capital inflows. In this case, major cryptocurrencies such as Bitcoin and Ethereum are likely to gain more capital favor, driving their prices to rebound in the short term.
Increased safe-haven demand under inflationary pressure: interest rate cuts are usually accompanied by monetary easing policies, which often trigger rising inflation expectations. Cryptocurrencies, especially Bitcoin, are often seen as assets that hedge against inflation. In this context, investors may regard Bitcoin as "digital gold", which will drive up demand and prices will also be supported in the short term.
The correlation between the depreciation of the US dollar and the appreciation of cryptocurrencies: interest rate cuts often lead to a weakening of the US dollar, and there is a certain negative correlation between cryptocurrencies and the US dollar. When the US dollar depreciates, cryptocurrencies denominated in US dollars (such as BTC, ETH) may appreciate because investors are more inclined to transfer assets from the US dollar to other assets with value storage functions.
Increased short-term volatility: Although the interest rate cut is generally beneficial to the rise of cryptocurrency prices, the market may experience greater volatility in the short term. Investors have different expectations for the Fed's policies, and different types of traders in the market may adopt different strategies, resulting in greater price fluctuations. Therefore, although the interest rate cut is generally beneficial, the market's short-term volatility has increased.
Movements of institutional investors and ETFs: As more institutional investors enter the market through Bitcoin ETFs and other means, interest rate cuts will also affect the investment behavior of these institutions. If expectations of interest rate cuts increase, these institutions may increase their allocation to Bitcoin and other crypto assets, further driving the market's short-term rise.
After each rate cut, the cryptocurrency market often experiences a decline followed by a rise. There are several important reasons behind this volatility:
1. Market expectations and the “buy expectations, sell facts” effect
The news of rate cuts is usually anticipated by the market in advance. When investors expect the Federal Reserve or other central banks to cut interest rates, they will buy high-risk assets such as cryptocurrencies in advance in order to profit after the interest rate drops. This advance buying pushes up the price of cryptocurrencies. However, once the rate cut decision is actually implemented, the market's reaction is often to "sell the fact" - that is, investors choose to take profits after the good news is announced, resulting in a short-term price correction.
2. Liquidity shock and market sentiment
Although interest rate cuts are good for cryptocurrencies in the long run, they may cause a certain liquidity shock in the short term. In the early stages of interest rate adjustments, funds in the market may face pressure to reallocate, and some institutional investors will temporarily sell high-risk assets to manage risks or hedge positions, causing a drop in cryptocurrency prices.
3. Macroeconomic uncertainty
Rate cuts are usually accompanied by a backdrop of economic downturn or slowing growth. Investors’ concerns about the economic outlook may lead to increased risk aversion in the short term, which will also prompt them to withdraw funds from high-risk assets (such as cryptocurrencies) and turn to safe-haven assets (such as the US dollar or gold), causing cryptocurrency prices to fall briefly.
4. High volatility characteristics of the crypto market
The cryptocurrency market itself has high volatility, low liquidity and relatively small market size, making it more sensitive to macroeconomic changes. The macro capital flow triggered by interest rate cuts may lead to amplified volatility in the crypto market, resulting in drastic price changes in the short term.
5. Behavior of Institutional Investors
The entry of institutional investors into the crypto market has exacerbated short-term volatility. Interest rate cuts may affect the flow of funds for these institutions, and they may take short-term operations to hedge risks or adjust their portfolios, leading to short-term price declines.
