Will a Fed Rate Cut Trigger the Next Bitcoin Bull Run?

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Bitcoin has been trading in a wide range between $50,000 and $70,000 for several consecutive months. Following the block reward halving, the next major market catalyst appears to be an upcoming Federal Reserve interest rate cut.

This event now seems almost certain. According to the CME FedWatch Tool, there is a 100% probability of a rate cut by September 24, with the debate centered on whether it will be a 25 or 50 basis point reduction—both outcomes are currently seen as equally likely.

The critical question for investors is whether this shift in monetary policy will ignite a significant rally in Bitcoin and the broader cryptocurrency market. This analysis revisits five major Fed rate-cutting cycles from 1989 to 2019 to identify any consistent patterns that might offer clues.

Lessons from the 2018-2020 Cycle

The most recent Fed hiking cycle concluded on December 19, 2018. The first rate cut of the new cycle followed roughly three quarters later, on July 31, 2019. This period marked the first, and so far only, rate-cutting cycle that the Bitcoin and cryptocurrency market has experienced.

A review of Bitcoin's price action alongside the Nasdaq Index and gold reveals a clear pattern: the market impact of the rate cuts was largely "priced in" well before they occurred. This was especially true for Bitcoin, which rallied 161.7% between the final rate hike and the first cut. Over the same period, the Nasdaq gained 23.2% and gold rose 13.7%. Interestingly, after the cuts began, only the Nasdaq and gold continued their ascent, while Bitcoin entered a phase of prolonged and wide-ranging consolidation.

Just before the final rate cut on March 15, 2020, Bitcoin experienced the infamous "Black Thursday" crash, a collapse mirrored across global markets. In response, the Fed had already slashed rates to 0.00%-0.25% and initiated an unprecedented quantitative easing program. The massive liquidity injection that followed eventually spilled over into the crypto markets, fueling the monumental bull run of 2021.

Drawing a parallel to the present, the period following the last rate hike on July 27, 2023, shows a similar pattern of anticipation. From that date until August 2, Bitcoin's price surged 122.6%, again significantly outperforming the Nasdaq's 19.4% gain and gold's 27% rise. This suggests that, once again, the market may have already priced in the expectation of a policy pivot.

A Look Back: 1989 to 2008 Rate Cycles

To find earlier U.S. rate-cutting cycles, we must look back to 2007, a time before Bitcoin existed. However, given that crypto markets are generally considered to have a strong correlation with U.S. equities, we can use the Nasdaq and gold as proxies to understand the potential relationship between rate cuts and asset price movements.

The 2006 Cycle: A Hard Landing

This cycle unfolded against the backdrop of the 2007 subprime mortgage crisis, which led to a severe breakdown of the financial system.

Market Performance:

The Fed began cutting rates in September 2007 to counter the rapidly deteriorating financial conditions and the threat of a major economic slowdown. It was in this environment of monetary response to a crisis that Bitcoin was born.

The 2000 Cycle: A Hard Landing

This cycle was defined by the bursting of the dot-com bubble, which caused a dramatic devaluation of tech stocks and internet companies.

Market Performance:

The Fed initiated a series of aggressive rate cuts in early 2001 to alleviate recessionary pressures. Despite this, market sentiment remained extremely pessimistic due to the massive market crash and a sharp decline in corporate earnings.

The 1995 Cycle: A Soft Landing

This period was characterized by a relatively strong U.S. economy in the early stages of technological innovation and internet development.

Market Performance:

The 1995 rate cuts were a brief, preemptive measure intended to support the economy's ongoing expansion, not to rescue it from a crisis.

The 1989 Cycle: A Soft Landing

The U.S. economy was coming off a long expansionary period in the 1980s, but was facing high inflationary pressures.

Market Performance:

The rate hikes of 1988, designed to combat inflation, began to suppress economic growth by 1989, prompting the Fed to reverse its policy.

Key Conclusions and Market Implications

Based on this historical analysis, several key conclusions emerge:

Therefore, history suggests that a Fed rate cut is unlikely to be the fundamental driver of a sustained upward move in Bitcoin and cryptocurrency prices. While it provides a supportive liquidity backdrop, it is not a magic bullet.

Throughout 2024, the market has digested major events like the launch of Bitcoin spot ETFs and the halving. The search is now on for the next grand narrative or fundamental shift to provide the next leg up. For those looking to understand how macro liquidity interacts with crypto assets, it's crucial to explore more strategies that account for these complex dynamics.

Frequently Asked Questions

How do interest rates affect Bitcoin's price?
Interest rates indirectly influence Bitcoin by affecting the broader financial environment. Lower rates make riskier assets like Bitcoin more attractive compared to yield-bearing safe havens. They also increase system-wide liquidity, which can flow into crypto markets. However, this effect is often anticipated by traders long before the actual policy change.

Is Bitcoin a good investment during a rate-cutting cycle?
Historical data shows that Bitcoin often performs very well in the anticipation of a rate-cutting cycle, as seen in 2019 and 2023. Its performance after cuts begin is more mixed and depends on whether the cuts are seen as a positive for risk assets (soft landing) or a response to a major crisis (hard landing), which causes initial panic.

What is "priced in" and why is it important?
"Priced in" means that the market has already anticipated a future event, like a rate cut, and has adjusted asset prices accordingly. If an event is fully priced in, its actual occurrence may not cause a significant price move, as there are no new surprises to trigger trading activity. This is a critical concept for timing any investment.

How does Bitcoin behave compared to gold during rate cuts?
Both are often seen as alternative stores of value, but their reactions can differ. Gold has a longer history of reliably rising during rate-cut periods due to its inverse relationship with the dollar. Bitcoin's performance is more volatile; it can see massive gains in anticipation of cuts but may stagnate afterward if the catalyst is seen as exhausted.

What drives Bitcoin's price if not interest rates?
While macro factors like interest rates set the stage, Bitcoin's price is primarily driven by its own internal dynamics. These include adoption rates, regulatory developments, technological upgrades, network security, and its inherent scarcity enforced by the halving events that reduce new supply.

Should I buy Bitcoin before or after a Fed rate cut?
History suggests that the most significant price appreciation often occurs in the lead-up to the first rate cut, as the market anticipates the shift in policy. Buying after the cut may mean entering a market that has already factored in the news. A disciplined dollar-cost averaging strategy can help navigate this uncertainty. To make informed decisions, you can view real-time tools that track these macro trends.