Fed Cuts Unexpectedly Endanger Bitcoin's Rally for a Reason, Analysts Warn

Crypto markets expect the Fed to announce new rate cuts this week. Investors are expecting a 25 or 50 basis point cut in rates. While the cuts could send bitcoin to new highs, some warn they could hurt markets.

Contents

Investor confidence Crypto market movers What are we studying?

Investors await the Federal Reserve's decision on interest rates this Wednesday, but some warn that too dramatic a cut could hurt risk-on assets like bitcoin.

Low interest rates are generally seen as a boon for risk-on assets like cryptocurrencies. Conversely, however, a more aggressive cut for Bitcoin price could be bad.

why That's because the economy is worse than people think, says Shannon Sacocia, chief investment officer at Neuberger Berman Private Wealth. Market Watch.

“If the Fed signals deeper concerns about the economy, market participants may pull back from assets they perceive as risky, including bitcoin,” wrote Dave Birnbaum, VP of Product & Marketing at CoinBits. Forbes.

Chicago Mercantile Exchange FedWatch tool It currently shows a 59% probability of a 25 basis point cut and 41% for a larger 50 basis point cut.

Data from RIA analyst Michael Lebowitz It shows that markets have historically underestimated the Fed's level of rate cuts during easing cycles. During the 2000-2003 and 2007-2009 periods, the market misjudged the Fed's cuts. This suggests that expecting a cut of 25 basis points is too conservative.

Investor confidence

Crypto investors hope the new rate cuts will increase demand for riskier assets like Bitcoin. There's a reason they're bullish.

Historical data shows that Bitcoin price often rallies when the Fed eases monetary policy.

Join the community to get our latest articles and updates

In October 2019, the Fed made three consecutive 25 basis point cuts, which Jerome Powell called “Mid-cycle adjustment.”

While the start of the Covid-19 pandemic took Bitcoin to a long-term low in March 2020, the price eventually rose 1,300% to reach $60,000 for the first time.

Investor confidence already appears to be rising ahead of the Fed meeting.

Digital asset investment products saw inflows of $436 million last week, compared to outflows totaling $1.2 billion in the previous two weeks, according to the latest CoinShares data.

The increase in inflows was “driven by a significant shift in market expectations for a 50 basis point interest rate cut,” Coinshares analyst James Butterfill wrote.