U.S. Fed Rate Cut: Cryptocurrency Market Outlook

In September, The Federal Reserve cut U.S. short-term borrowing costs, signaling a shift in the economic landscape. The dollar and U.S. Treasury yields dropped, while U.S. equities experienced significant gains.

Historically, rate cuts have triggered volatility in both the stock and cryptocurrency markets. However, this time, the dynamics are different. As the West enters a rate-cut cycle, the East, like China is also lowering its interest rates. This has led to simultaneous growth in both the cryptocurrency market and Chinese A-Shares.

The Start of the Rate Cut Era Amid Uncertainty

Before the official decision, market consensus was already leaning towards a Fed rate cut. The debate was only about whether it would be a 25 or 50 basis points cut. This difference represents the Fed’s approach — whether they intend to act aggressively or proceed cautiously, especially as the U.S. presidential election draws near.

In 2020, the Fed, under pressure from then-President Trump, initiated a cycle of rate hikes to combat the economic impact of the COVID-19 pandemic. This led to a global influx of dollar assets back into the U.S., inflating the country’s GDP numbers. However, the trade war extended the period of high inflation in the U.S., persisting to this day.

For cryptocurrencies, this could be a favorable market signal. Bitcoin, as an alternative currency system competing with the dollar, tends to gain value when the dollar weakens. For example, after the 2020 rate cuts, Bitcoin surged from the $4,000-$6,000 range to a peak of $69,040 in November 2021, representing a more than tenfold increase. At that time, former President Trump, who is now an advocate for Bitcoin, suggested it as a solution to address the U.S. national debt. Hypothetically, even if only 1% of the $35 trillion U.S. debt were to flow into the Bitcoin market, it could drive Bitcoin’s price significantly higher.

However, this scenario remains speculative. Such a move could create a liquidity crisis for Bitcoin. If U.S. debt were converted into Bitcoin, it would create massive buying pressure, but the U.S. government might find it difficult to liquidate its holdings later, as the global market may not have the liquidity to absorb such a sale.

Despite the challenges, the liquidity effect triggered by the rate-cut cycle is significant. With substantial capital looking for investment opportunities, a portion will flow into stock buybacks and cryptocurrencies. However, the impact on the overall cryptocurrency market may not be as pronounced as before.

Current Cryptocurrency Market Dynamics

The current crypto market is marked by the rise of BTC/ETH ETFs, which are largely disconnected from the altcoin sector. If capital continues to concentrate on ETFs, it is unlikely to benefit the high-valued, low-liquidity altcoins.

Another factor is the chance of Kamala Harris being the next U.S. president. Recently, she publicly expressed support for cryptocurrency investments, pledging to increase investment in the AI and cryptocurrency sectors if elected. In her speech at the Pittsburgh Economic Club, she emphasized that under her leadership, the U.S. would remain committed to maintaining global leadership in blockchain and emerging technologies.

However, the Democratic Party’s overall policy approach leans toward increased government oversight, which may curb excessive financial speculation. It’s unlikely Harris would provide the same level of support for financial markets, including cryptocurrencies, as Trump did.

Recession Fears Cloud the Cryptocurrency Market Outlook

Although the U.S. remains a global economic leader, the 2020–2024 rate hike cycle failed to bring about a comprehensive market correction. As a result, the risk of a U.S. economic recession still looms.

Historically, during rate-cut cycles, the Fed’s monetary policies have not always succeeded in preventing recessions, especially when the economy is already on the brink. Bloomberg Economics estimates a 70% chance that the U.S. economy is either already in or nearing a recession, highlighting that rate cuts alone cannot eliminate recession risks. Unemployment indicators also show that the Fed hopes these rate cuts will stimulate further job growth.

Additionally, the U.S. economy’s performance is intertwined with global economic trends. Rate cuts typically weaken the dollar, as they reduce the appeal of dollar-denominated assets, pushing investors to seek higher-yield alternatives. This currency shift boosts U.S. export competitiveness by making goods cheaper in international markets. However, if other central banks, like the European Central Bank, also lower rates, the impact could be mitigated.

In fact, major global economies, including the ECB and China’s central bank, have either already initiated or are planning rate cuts, altering the traditional dynamics of the dollar’s influence on global markets.

Impact on Cryptocurrencies: A Dual Perspective

The impact on cryptocurrencies can be categorized into two segments: foundational assets like Bitcoin and Ethereum, and application-based tokens such as those supporting dApps and protocol-based projects. Each segment responds differently to changes in Fed policy.

• Foundational Cryptocurrencies: Cryptos like Bitcoin are often viewed as digital gold, and their prices are highly sensitive to monetary policy changes. For instance, when the Fed tightens policy, Bitcoin’s price tends to rise, reflecting its role as a hedge during economic and financial instability. Bitcoin’s volatility and relative predictability also underscore its appeal as a store of value.
• Application-Based Cryptocurrencies: Tokens tied to blockchain applications or protocols, such as stablecoins, are less sensitive to monetary policy shifts. These assets rely more on technological advancements and ecosystem growth rather than external economic influences.

One positive development could be the demand for Bitcoin in regions with volatile currencies, like Turkey. In countries where fiat currencies experience significant fluctuations, Bitcoin often commands a premium. As the dollar weakens, investors in these regions may turn to Bitcoin as a hedge, thereby driving up its price.

Conclusion

While the U.S. dollar remains a dominant international currency and store of value, it is increasingly evident that cryptocurrencies may play a crucial role in stabilizing the dollar system. The era of significant transformation has begun.