Rate cuts are here – Is Bitcoin set to surge?

Moomoo Learn joined discussion · Sep 10 14:31

There's a common belief that Federal Reserve rate cuts may boost Bitcoin's price. While this idea has merit, it's too simplistic. With rate cuts now happening, let's delve deeper:

- Why do rate cuts affect Bitcoin's price?

- Does Bitcoin always rise immediately after a rate cut?

- How much can rate cuts boost Bitcoin's price?

These questions are crucial for our investment strategy. Let's explore them in this article.

Rate cuts: Boosting liquidity and inflation

I. Boosting liquidity

The Fed's interest rate cut will drive down market interest rates, thereby reducing the cost of capital in society. This usually stimulates investment, pushing investors toward high-risk, high-reward assets like Bitcoin. Why?

What some may not realize is that Bitcoin has secured its spot among the world's top ten assets, while remaining highly resilient.

Rate cuts are here – Is Bitcoin set to surge?

II. Rising inflation

Inflation often accompanies rate cuts. Despite the Federal Reserve's efforts to control it, whether inflation will remain in check after rate cuts is uncertain.

If unexpected inflation spikes during a rate cut cycle, Bitcoin, known as "digital gold," could benefit significantly.

Its fixed supply and decreasing issuance rate make it scarce and inflation-resistant. As fiat currencies devalue, Bitcoin's value tends to increase.

Historically, Bitcoin has surged after each halving event, likely due to its strengthened inflation resistance.

Bitcoin halving refers to the event where the mining rewards for Bitcoin are cut in half, significantly reducing the rate at which new coins are supplied.

Will Bitcoin always surge right after a rate cut?

Let's look at the last two rate cut cycles:

- 2019 Rate Cut: The market started reacting to anticipated rate cuts as early as April, with Bitcoin's price rising from around $4,000 to $13,000. However, when the Federal Reserve actually cut rates in July, Bitcoin's price initially dropped by 30% before it began to climb again.

- 2020 Rate Cut: In March 2020, the Federal Reserve implemented substantial rate cuts in response to the COVID-19 pandemic. However, Bitcoin's price didn't surge immediately; the main upward trend began at the end of the year.

Clearly, the relationship between rate cuts and Bitcoin's price isn't as straightforward as "rate cut equals immediate price rise." Bitcoin's price may either rise in anticipation of rate cuts or experience a delayed increase.

So, what can we expect this time? Let's examine the historical trends of the federal funds rate and Bitcoin prices.

Historical data suggests the current market resembles 2019:

- Both 2018 and 2022-2023 rate hikes led to Bitcoin bear markets.

- When rate hike stopped, anticipation of rate cuts sparked early Bitcoin rallies in H1 2019 and Q4 2023 to Q1 2024.

After the September rate cut, the market may initially drop, similar to July 2019. However, this time might be different. The market has already adjusted in Q2 and Q3, with prices falling from over $70,000 to below $60,000. Thus, a decline post-rate cut isn't guaranteed.

Outlook: Will the next bull market arrive? How strong will it be?

For the market to enter a bull run, a single rate cut may not suffice, as the market might have already priced it in. Key factors to watch include:

I. Magnitude of Rate Cuts: Will interest rates decline rapidly?

II. Reason for Rate Cuts: Is an economic recession forcing the Fed to tolerate higher inflation?

III. Post-election regulatory changes, on-chain fundamentals, etc.

How high could Bitcoin's price go if the next Bitcoin bull market materialize? The following chart reviews Bitcoin's historical price surges:

Historical data shows that Bitcoin's early bull markets had staggering gains, but each subsequent bull market has seen diminishing returns. This trend is likely to continue due to Bitcoin's growing market size, which requires significantly more capital to achieve the same percentage gains.

However, even without multi-fold increases, a price rise of 50% to 200% is still possible. Let's look forward to what the future holds!

Risk Warning: Bitcoin is a high-risk investment and investors are advised to be aware of the risk of investment loss. This article is for reference only and does not constitute investment advice.

How to invest in Bitcoin

In addition to direct purchase, a convenient way is investing in Bitcoin ETFs, which offer easy trading and avoid the hassles and risks of direct ownership. More details on: Investing Bitcoin with ETFs