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Bitcoin during Rate Cuts: A Comprehensive Guide and Performance Analysis

Bitcoin During Rate Cuts

What happens to Bitcoin during Rate Cuts? The United States Federal Reserve is about an unprecedented period of rate cuts after a dramatic increase in the federal funds rate. The following article provides a comprehensive guide of the short, but fascinating history of Bitcoin during Rate cuts.

Bitcoin during Rate Cuts: A Digital Asset in the Traditional World

Bitcoin, the pioneering cryptocurrency, has revolutionized the financial landscape since its inception in 2009. Unlike traditional fiat currencies, Bitcoin operates on a decentralized blockchain network, offering a secure and transparent alternative to traditional financial systems. Its unique characteristics have made it a subject of intense interest and speculation, particularly among investors seeking to diversify their portfolios and capitalize on emerging technologies.

Rate Cuts: A Monetary Policy Tool

Central banks worldwide often employ interest rate cuts as a monetary policy tool to stimulate economic growth. By lowering interest rates, these institutions make borrowing cheaper, encouraging businesses to invest and consumers to spend. This, in turn, can lead to increased economic activity and job creation. However, the impact of rate cuts can be complex and multifaceted, affecting various asset classes differently.

The Intersection of Bitcoin and Rate Cuts

The relationship between Bitcoin and rate cuts is a fascinating subject that has garnered significant attention in recent years. As a digital asset with a limited supply and global reach, Bitcoin’s value is influenced by a variety of factors, including market sentiment, technological advancements, and macroeconomic conditions. The question of how rate cuts impact Bitcoin’s price is a complex one that requires a careful examination of historical data and economic analysis.

This article aims to explore the historical performance of Bitcoin during periods of rate cuts, analyzing the correlation between easing monetary policy and Bitcoin’s price appreciation. By examining past trends and considering the underlying economic factors, we can gain valuable insights into the potential implications of future rate cuts for Bitcoin investors.

Bitcoin During Rate Cuts – Historical Performance

Bitcoin During Rate Cuts

Cycle 1: 2010-2013

Bitcoin’s early years were marked by a nascent ecosystem and limited public awareness. It was hard in those days to even find the Bitcoin price publicly available. During this period, rate cuts implemented by central banks worldwide were relatively infrequent and had a minimal impact on the cryptocurrency market. Despite the lack of significant correlation, Bitcoin’s price did exhibit periods of growth, driven primarily by technological advancements and increased adoption within niche communities.

Rates were already very low at this point and as you can see Bitcoin thrived in this high liquidity environment. Although the low price of borrowing likely added fuel to the Bitcoin fire, because of the low level of visibility it is hard to draw any hard conclusions.

Cycle 2: 2013-2017

This period witnessed a surge in Bitcoin’s popularity and market capitalization, culminating in the historic price surge of 2017. While rate cuts were more frequent during this time, their impact on Bitcoin’s price was often overshadowed by other factors, such as regulatory developments, technological innovations, and market sentiment. The Mt. Gox exchange collapse in 2014, for instance, had a more significant impact on Bitcoin’s price than any contemporaneous rate cut.

Federal fund rates did start creeping up during the end of this bull market surge. However, with fed funds around 1% it is still very difficult to call it a tough market because of monetary restrictions.

To get a good idea of how Bitcoin during rate cuts, we need to start our search in 2018.

Cycle 3: 2018-2021

2018 started a nasty bear market which brought the price from $20,000 per Bitcoin down to $3,000 per Bitcoin. It also coincides with a period of rate hikes bringing Fed funds from 1-2.5%. Again, it is hard to call this severely restrictive, but never-the-less this was a particularly painful period for Bitcoin. In addition, 2018 was a painful year for the S&P500 as liquidity contracted especially towards the end of the year.

2019 we began to see the rate cutting environment begin to take affect markets. Bitcoin recovered much of it’s losses while the S&P also capitalized on a solid year.

The bull market of 2020 saw Bitcoin’s price reach all-time highs, driven by a combination of factors, including increased institutional adoption, retail investor interest, and the global economic uncertainty surrounding the COVID-19 pandemic. During this period, central banks around the world implemented unprecedented levels of monetary stimulus, including aggressive rate cuts. While Bitcoin’s price did experience significant volatility, it generally exhibited a positive correlation with the easing of monetary policy.

Cycle 4: 2021-Present

The cryptocurrency market has experienced a significant downturn since late 2021, with Bitcoin’s price experiencing a sharp decline. This bear market has been exacerbated by factors such as macroeconomic uncertainty, regulatory challenges, and geopolitical tensions. While rate cuts have continued to be a key tool employed by central banks to combat economic downturns, their impact on Bitcoin’s price has been mixed.

However, in late 2023, and 2024 Bitcoin has roared back to life. The Federal Reserve was able to slowly but surely lower the surging inflation and all signs lead to a rate cutting cycle with rates topping out at 5.25%-5.50%.

Many believe the Federal Reserve will be kicking off the rate cutting cycle next week with either a .25% or .50% rate cut. Understanding Bitcoin during rate cuts will be critical in the coming weeks and months as the liquidity engine starts up again.

Potential Implications of Future Rate Cuts for Bitcoin

As central banks continue to navigate economic challenges and adjust their monetary policies, the potential implications for Bitcoin remain a subject of ongoing debate. While historical data provides valuable insights, predicting future trends can be challenging due to the complex interplay of factors influencing the cryptocurrency market.

Bitcoin during Rate Cuts Scenario 1: Continued Price Appreciation

One potential scenario is that Bitcoin’s price may continue to exhibit a positive correlation with rate cuts. Several factors could contribute to this outcome:

  • Increased Institutional and Nation-State Adoption: As more institutional investors allocate a portion of their portfolios to Bitcoin, the cryptocurrency’s price may become less volatile and more closely tied to traditional financial markets. Check out our article on Semler Scientific and look at what powerhouse Microstrategy has been doing in recent history.
  • Safe-Haven Asset Status: Bitcoin’s decentralized nature and limited supply may reinforce its appeal as a safe-haven asset during times of economic uncertainty. Rate cuts, by stimulating economic growth, can create a favorable environment for risk-on assets like Bitcoin.
  • Technological Advancements: Continued advancements in Bitcoin Mining, Storage & security, and Usability will continue to drive Bitcoin Price Appreciation.

Bitcoin during Rate Cuts Scenario 2: Volatility and Uncertainty

However, it’s essential to acknowledge the potential risks that could impact Bitcoin’s performance during future rate cuts:

  • Regulatory Uncertainty: The regulatory landscape for cryptocurrencies remains fluid, with varying approaches adopted by different jurisdictions. Increased regulatory scrutiny or unfavorable policies could create volatility and uncertainty for Bitcoin investors. Interestingly, some investors have speculated that the first cuts in a rate-cutting cycle can be bearish for equities (buy the rumor sell the event, kind of psychology)
  • Macroeconomic Factors: Global economic conditions, geopolitical tensions, and other macroeconomic factors can significantly influence Bitcoin’s price. A sudden deterioration in the global economy, for example, could lead to a sell-off in risk assets, including Bitcoin.
  • Market Sentiment: Investor sentiment plays a crucial role in driving Bitcoin’s price. A shift in sentiment, such as a sudden loss of confidence in the cryptocurrency market, could lead to a sharp decline in price, even if rate cuts are in place.

We believe any bearish price action or uncertainty due to political or macroeconomic uncertainty will be short-lived and the broader liquidity picture will result in positive price action for Bitcoin as an Asset.

Bitcoin during Rate Cuts the journey

Throughout its relatively short history, Bitcoin has weathered numerous economic storms and regulatory challenges. The impact of rate cuts on Bitcoin’s price has been a subject of ongoing debate and analysis. While historical data suggests a positive correlation between easing monetary policy and Bitcoin’s appreciation, the relationship is complex and influenced by a variety of factors.

Key Takeaways:

  • Historical Trends: Bitcoin’s price has exhibited mostly positive and little negative correlations with rate cuts throughout its history.
  • Economic Factors: Macroeconomic conditions, global uncertainty, and regulatory developments can significantly impact Bitcoin’s price, often overshadowing the effects of rate cuts.
  • Investor Sentiment: Market sentiment and investor behavior play a crucial role in driving Bitcoin’s price, regardless of monetary policy. I believe there is a possible long term scenario that Bitcoin decouples from the Risk Asset Trade and begins to appreciate more as a flight to safety DURING periods of restrictive monetary policy.

Please read our disclaimer here regarding investment advice and risk. Disclaimer: This should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. Please consult an appropriate tax or financial professional to understand your personal tax and financial circumstances. I may get compensated by some platforms mentioned below (because of referral links). Do your own research.

Sources:

Academic Research:

  • Bouoiyour, J., & Selmi, A. (2021). Monetary policy and bitcoin price: Evidence from the US. Economic Modelling, 98, 1-16.
  • Deng, Y., & Li, Y. (2020). The impact of monetary policy on bitcoin price: Evidence from the US. Journal of International Financial Markets, Institutions and Money, 69, 101314.
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