Why the Fed’s rate cut may not be as good for Bitcoin as expected

• Last Thursday's inflation report may set the stage for the Federal Reserve to start cutting interest rates this year.

• While the cryptocurrency community expects the first rate cut to spark a Bitcoin bull run, the reaction depends on the context in which the central bank eases policy.

Following yesterday’s inflation report, it seems increasingly likely that the Federal Reserve (Fed) will begin cutting interest rates this year, satisfying cryptocurrency bulls’ long-standing desire for a more risk-tolerant macroeconomic environment.

The consensus in the cryptocurrency market community is that rate cuts, likely to begin in September, will increase fiat liquidity, catalyzing demand for riskier investments such as Bitcoin (BTC).

While this makes sense, the market may have already priced in any easing. Expectations of rate cuts have dominated crypto and traditional market sentiment since the second half of 2022 and were one of the key catalysts for Bitcoin’s surge from a low of around $15,000 in 2022 to an all-time high of over $73,000 this year. Therefore, an actual rate cut may only elicit a lukewarm reaction from the market.

Perhaps more important is the context of the rate cut.

If rate cuts occur during a period of low inflation and economic prosperity, the stimulus to asset prices may be more pronounced. Cutting rates amid signs of economic fragility could send a negative signal, prompting investors to move money from riskier assets to safer assets such as government bonds.

“If the Fed cuts rates in September 2024 solely on inflation concerns, this could be a short-term positive for Bitcoin,” 10x Research founder Markus Thielen said in a note shared with CoinDesk. “However, if economic growth concerns drive a rate cut, whether in September or later, Bitcoin could face significant selling pressure.”

Thielen said that historically, Bitcoin has seen the biggest gains when the Federal Reserve pauses in its rate hike cycle. The first rate cut usually draws a tepid response.

“During the period when the Fed paused its rate hikes until July 2019, Bitcoin experienced explosive growth, returning +169%. After a seven-month pause in 2019, the Fed cut rates, kicking off a dramatic rate-cutting cycle. Initially, Bitcoin reacted positively, rising +19% in the week following the rate cut on July 31, 2019. However, two weeks later, Bitcoin was back to flatlining,” said Thielen.

Thielen added that rate cuts in the second half of 2019 were due to economic uncertainty and weighed on BTC prices. CoinDesk data showed that the cryptocurrency’s price fell 33% in the second half of the year.

The U.S. stock market is showing a similar pattern.

“The advent of a Fed rate-cutting cycle tends to coincide with a significant decline in the stock market,” Austin Pickle, a strategist at Wells Fargo Investment Institute, said last month, according to MarketWatch. “Since 1974, within 250 days of the Fed’s first rate cut, the stock market has fallen by an average of about 20%.”

Pickle added that if the Fed is forced to cut rates in response to macro weakness, the stock market will suffer.

This means that cryptocurrency traders should be wary of signs of a weakening U.S. economy.

According to Fidelity’s business cycle tracker, the U.S. economy was in the late stages of expansion at the end of the second quarter. Leading indicators such as new orders for consumer goods and materials, consumer confidence, and building permits point to future weakness. If weakness becomes more pronounced in the coming months, rate cuts will do little to help risk assets, including BTC.