The prices of virtually all assets are influenced by the monetary and fiscal policies of the U.S. Federal Reserve, and Bitcoin is no exception. Participants in the crypto market must consistently monitor key U.S. economic indicators, the tone of statements from Federal Reserve officials, and the direction of monetary policy. With the approval of Bitcoin spot ETFs, the impact of dollar liquidity cycles on the crypto market is becoming increasingly significant. This article reviews Bitcoin's price performance across different stages of the Fed’s policy cycle.
The Period From Final Rate Hike to Initial Rate Cut
In the historical instance from December 2018 to July 2019, Bitcoin’s price action can be characterized as a period of consolidation followed by a strong upward trend. The price rose from around $3,500 to approximately $12,000.
The main upward movement began in April 2019, which closely aligned with the deceleration of quantitative tightening (QT) in May 2019. This suggests that the market began pricing in rate cut expectations about three months in advance.
This historical phase corresponds to the stage the market is in currently. As of now, about six months have passed since the Fed’s last rate hike in July 2023. Consistent with past patterns, Bitcoin began a significant upward trend around October 2023—roughly three months after the halt in rate hikes. While the price over the past half-year has been significantly influenced by ETF approval expectations, the timing and price action still remarkably align with the previous cycle’s pattern.
From First Rate Cut to Pre-Pandemic Disruption
This phase, spanning from July 2019 to March 2020, saw Bitcoin’s price decline initially and then recover.
Shortly after the first rate cut, the price dropped from around $10,000 to roughly $7,000 by December—a decline of about 30%. It is worth noting that the end of QT in September 2019 did not have a markedly positive impact during this period. A recovery then occurred from December 2019 into February 2020, pushing the price back toward the $10,000 level.
This is the phase the market is expected to enter in 2024. Historically, Bitcoin’s performance following the initial rate cut and the conclusion of QT was characterized by an initial drop followed by a recovery.
Analyzing these two phases in conjunction with the Net Unrealized Profit/Loss (NUPL) metric can provide valuable insights for identifying potential local tops and bottoms.
The Pandemic-Induced Easing Phase
Beginning in March 2020, in response to the COVID-19 pandemic, the Federal Reserve swiftly cut interest rates and initiated a large-scale quantitative easing (QE) program. Coupled with the Bitcoin halving in May 2020, the market experienced a brief downturn before embarking on a powerful bull run. Bitcoin’s price soared from approximately $5,000 to around $65,000.
The market peak occurred in November 2021, about four months before the end of the easing cycle (the first rate hike occurred in March 2022). This indicates that the market began pricing in rate hike expectations roughly four months in advance, a timeframe consistent with the lead time observed for pricing rate cuts.
Barring another black swan event, it is unlikely the current bull run will mirror the aggressive monetary policy or the rapid price appreciation of that period. Nevertheless, the overall directional influence remains.
The Tightening Cycle: From First Hike to Final Hike
This period, from the initial rate hike in March 2022 to the final hike in July 2023, alongside QT beginning in June 2022 and continuing, was marked by a severe bear market for Bitcoin.
The price fell from around $46,000 to a low near $16,000. The decline lasted approximately nine months before a rebound began in early 2023.
The synchronous rise of Bitcoin and the Nasdaq index starting in early 2023 was likely driven by market expectations that U.S. Treasury yields had peaked for the time being and that the pace of Fed rate hikes would slow.
Overall, the historical record suggests that the impact of rate cuts on the Bitcoin market may be more pronounced than that of QT reduction. This leads to the pivotal question for the current year: when will the rate cuts begin?
Outlook for 2024 and Market Dynamics
Following the December FOMC meeting, Fed Chair Jerome Powell sent dovish signals, which fueled market expectations for imminent rate cuts. However, recent U.S. data has been robust. December's CPI came in at 3.4% year-over-year (up from 3.1% prior), and core CPI was 3.9% (down from 4.0% but above expectations), alongside a still-tight labor market. Current market pricing suggests a 52.88% probability that the Fed will not cut rates in March.
The prevailing expectation is that the first cut will now occur either in May. Historically speaking, this could potentially trigger a market correction around that time. Of course, the spot ETF is a major new variable, with the sell-pressure from GBTC and the "buy the rumor, sell the news" dynamic around the approval being dominant factors affecting Bitcoin's price recently.
Furthermore, the timing of the Bitcoin halving is notably different this cycle. In the last cycle, the halving occurred about ten months after rate cuts began. This time, the halving is scheduled to occur roughly between the market's two expected starting points for rate cuts. While post-halving price rallies often lag the actual event, the timing may help offset some potential downward pressure following the initial rate cut.
For those looking to track these macro developments and their real-time impact on crypto markets, explore advanced analytical tools that can provide deeper insights.
Frequently Asked Questions
How does Federal Reserve policy affect Bitcoin's price?
Federal Reserve policies influence global liquidity and investor risk appetite. Expansionary policy (low rates, QE) tends to increase liquidity and encourage investment in risk-on assets like Bitcoin, often driving its price up. Conversely, contractionary policy (rate hikes, QT) reduces liquidity and can cause investors to flee to safer assets, potentially depressing Bitcoin's price.
Why did the price drop after the first rate cut in 2019?
Market reactions can be complex and are often driven by expectations. By the time the first cut happens, the expectation of easing may have already been priced in. The actual event can then trigger a "sell the news" reaction, or investors might interpret the cut as a sign of significant underlying economic weakness, causing fear and a short-term sell-off.
What is more important for Bitcoin, rate cuts or quantitative tightening?
Historical analysis suggests that interest rate changes have a more direct and observable impact on Bitcoin's price than adjustments to the Fed's balance sheet (QT). Rate changes immediately affect the cost of borrowing and capital flows, making them a more potent signal for risk assets.
How does the Bitcoin halving interact with Fed cycles?
The halving is a built-in, supply-side shock that historically has preceded major bull markets. Its interaction with Fed policy is crucial. A halving coinciding with or preceding a period of Fed easing (low rates, high liquidity) can create a powerfully bullish environment, as seen in 2020-2021. This cycle is unique because the halving is occurring amid shifting expectations for rate cuts.
Are past Fed cycles a reliable indicator for future Bitcoin performance?
While past cycles provide valuable context and patterns, they are not a perfect roadmap. Each cycle has unique elements—such as the introduction of spot ETFs this time—that can alter the market's dynamics. History is a guide, not a guarantee.
What should I monitor to anticipate Fed policy changes?
Key indicators include CPI and PCE inflation reports, non-farm payrolls and unemployment data, Fed meeting minutes and statements, and speeches by Federal Reserve officials, particularly the Chair. These provide clues about the committee's economic outlook and policy intentions. To stay on top of these developments, get advanced market analysis methods.