Fed rate hike: Will it end the bull market?

If we were to take stock of the most important "financial events" in the world in 2022, then "the Federal Reserve's interest rate hike" would undoubtedly occupy the "C position". It can be said that "whether the Federal Reserve will raise interest rates, how many times, and how to raise interest rates?" not only affects the rise and fall of the crypto market, and the changes between bull and bear markets, but also has a profound impact on everyone's work quality and income.

When the Federal Reserve just announced that it would raise interest rates, some netizens had already summarized the impact of the Fed's recent five interest rate hike cycles (as shown in the figure below). It can be seen that every time the Fed raises interest rates, it will cause catastrophic consequences worldwide, and some regions or industries may even face a catastrophe.

Netizens’ summary of the U.S. interest rate hike cycle and its consequences

The most recent interest rate hike cycle from 2004 to 2006 caused the subprime mortgage crisis, which was an important reason that prompted Satoshi Nakamoto to "create" Bitcoin. Satoshi Nakamoto also permanently wrote the famous "news headline" in the Bitcoin Genesis Block: "The Times, January 3, 2009, Chancellor of the Exchequer stands on the brink of a second bailout for banks."

So, if the Fed starts a new round of interest rate hikes in 2022, what consequences will it bring to the world and how will the crypto market be affected? Especially in the context of severe inflation and liquidity flooding caused by the global flood of money caused by the epidemic, the impact of the Fed's interest rate hike may be more extensive and far-reaching than the previous rounds.

In the future, Ouyi Academy will launch a series of articles on the Fed’s interest rate hikes, paying real-time attention to changes in the Fed’s monetary policy, and deeply interpreting the reasons behind the policies and possible impacts.

This article is the first in a series of articles, which will focus on these two questions: What will happen to the market after the Fed starts to raise interest rates? Will the market fall if the Fed raises interest rates?

Review of history: the relationship between the Fed's interest rate hikes and cuts and the rise and fall of Bitcoin

With the Fed's interest rate hike in 2022 almost a foregone conclusion, many people are worried that this will directly end the bull market. To be honest, this worry is very reasonable, because the Fed's interest rate hike is more bearish for the entire crypto market at a macro level.

However, raising interest rates is a complex economic issue, and it can be said to be one of the most core issues in modern economic theory. If we want to explain this clearly, we may need to open a separate column, and we will talk about it slowly later. Here we only want to say one thing: if the interest rate is raised, will the crypto market definitely fall? On the contrary, will the interest rate be lowered and the market will definitely rise?

Let me first give you the answer: not necessarily. The actual rise and fall may be exactly the opposite of the interest rate cut or increase policy. What is more important is to see what the reasons for the interest rate hike or cut are? What was the economic environment at the time and the development stage of the crypto market itself?

So from a historical perspective, how will the Federal Reserve’s interest rate hikes and cuts cause Bitcoin to rise or fall?

On January 3, 2009, the first Bitcoin was officially mined. In the following seven years, until December 2015, the Federal Reserve maintained interest rates at 0.25% due to the economic recession caused by the subprime mortgage crisis. Bitcoin has completed its development from 0 to 1. During this period, because Bitcoin was still in its early stages of development and no mainstream funds were involved, the rise and fall of Bitcoin at this stage was mainly affected by its own halving cycle, and the Federal Reserve's monetary policy had relatively little impact.

Starting from December 2015, due to the Fed's continued low interest rates, inflation became increasingly serious and caused the economy to overheat. Therefore, the Fed raised interest rates nine times in three years, until December 2018, when the interest rate was raised from 0.25% to 2.5%. During this period, Bitcoin just experienced its second halving, starting the second round of halving. During the first five interest rate hikes (December 2015-December 2017), Bitcoin continued to rise overall, rising 100 times despite the interest rate hike. The subsequent four interest rate hikes were relatively more intense, and Bitcoin also fell all the way after reaching the high point of the second halving at the end of 2017, with the highest drop of 85%.

At this stage, although the rise and fall of Bitcoin is still more affected by its own halving, the monetary policy of the Federal Reserve has had a huge impact on the rise and fall of Bitcoin. Basically, every time the Federal Reserve announces an interest rate hike, Bitcoin will fall in a short period of time. The four intensive and fierce interest rate hikes in 2018 directly ended the bull market.

Starting in August 2019, the Federal Reserve began to cut interest rates to promote economic development. By March 2020, due to the spread of global panic caused by the epidemic, all global markets collapsed, and the crypto market also experienced a memorable "3.12" crash. The Federal Reserve cut interest rates by 1% at one time. During this period, the Federal Reserve cut interest rates five times, from 2.5% to 0.25%. After the Federal Reserve announced a suspension of interest rate hikes in March 2019, Bitcoin gradually rebounded and a small bull market appeared. However, due to the emergence of the black swan of the COVID-19 epidemic, Bitcoin and the entire crypto market experienced a "3.12" crash.

During this stage, Bitcoin began to gradually gain recognition and participation from the mainstream world, allowing it to gradually share the same ups and downs as the mainstream market. The intervention of institutions represented by Wall Street and "Old Money" caused Bitcoin to gradually become "Americanized" and gradually resonate with the mainstream market.

From March 2020 to date, the Federal Reserve interest rate has continued to be between 0% and 0.25%. Coupled with the start of the third Bitcoin halving, as we can see, Bitcoin has experienced a vigorous bull market and reached its current historical high in November 2021: US$69,040. Subsequently, as the Federal Reserve gradually began to reduce its bond purchases and hinted at raising interest rates, people's expectations for interest rate hikes became increasingly strong, and Bitcoin began to fall continuously.

In summary, as Bitcoin becomes more mainstream and more U.S.-listed, the changes in the Fed’s monetary policy have a growing impact on the rise and fall of Bitcoin, and even largely determine the bull-bear pattern of Bitcoin. The Fed’s monetary policy at this stage is a bit like the eve of the end of QE and the start of interest rate hikes in 2015. After 2015, Bitcoin experienced a bull-bear transition in two and a half years.

Compared with the US stock market, will raising or lowering interest rates definitely lead to a fall/rise in prices?

If we compare with history, will Bitcoin still experience a bull market followed by a bear market, like the Fed’s rate hike in 2015? To answer this question, we need to first analyze the current situation of Bitcoin itself. Compared with the past, the fundamentals of Bitcoin have changed greatly. We have already discussed in our original article: “Bitcoin is becoming more like US stocks, will the boundaries between bull and bear markets gradually blur?” (available in the [News] column of the OUYI APP) that the fundamentals of Bitcoin are beginning to shift towards “US stocks”. So let’s take a look at how the US stock market has performed in all the rate hikes and cuts since 2009.

From third-party data, we can see that after the birth of Bitcoin in 2009, the US stock market has been in a bull market. Regardless of interest rate hikes or cuts, there have only been short-term bear markets or short-term crashes caused by black swans, and the fundamentals have been rising. The reasons can be simply summarized as follows:

First, the impact of the Fed's interest rate hikes and cuts on fundamentals has a certain lag, and the economic cycle has a very large inertia. For example, if the economy is overheated and the Fed raises interest rates, the US stock market should fall, but the Fed raised interest rates nine times from 2015 to 2018, and the US stock market has been rising, with only a slight drop in the final stage. Moreover, if interest rates are raised because of an overheated economy, then the overheated economy itself will cause most asset prices to rise.

Second, the U.S. stock market itself has benefited from the rapid growth of a large number of technology companies during this period, such as Facebook, Amazon, Apple, Netflix, Google and other companies. Their own development is of sufficient quality to offset the adverse effects of the Federal Reserve's monetary policy.

Of course, a simple comparison or comparison may not necessarily lead to the correct conclusion. We still need to analyze specific issues. Back to Bitcoin and the encryption market, we also need to analyze it from two aspects:

From the current economic environment, the global economy has been hit hard since the outbreak of the epidemic in 2020. Therefore, the central banks represented by the Federal Reserve have started a large-scale money-printing mode. Although this is conducive to economic recovery and development, it has also brought serious inflation. Therefore, the reason why the Federal Reserve wants to start raising interest rates this time cannot be completely attributed to economic overheating. Suppressing inflation is also an important goal. Moreover, the development of the global economy is not particularly healthy now. It is more like a prosperous bubble blown up by unlimited money release. This bubble has reached the point where it has to be squeezed. The key now is how to squeeze the bubble? If the interest rate is raised violently and the bubble is squeezed too quickly, all markets will be affected, and the Bitcoin and crypto markets are no exception. If the interest rate is raised slowly and the economy is on a soft path, then it depends on whether the Bitcoin and crypto markets themselves are strong enough.

Judging from the development of Bitcoin and the crypto market itself, this round of halving has seen a major development in the entire market from quantity to quality. Whether it is the prosperity of DeFi, the gradual maturity of public chains, or the popularity of NFTs and the metaverse and Web3, it shows that the entire industry is in a high-growth stage. So can this high growth offset the negative impact of the Fed’s interest rate hike?

In summary, in the future, whether the development speed and quality of Bitcoin and the entire crypto market itself can eventually offset the negative impact of the interest rate hike policies of central banks represented by the Federal Reserve will be the key factor in whether the crypto market can continue its bull market or even a long bull market. After all, a good blacksmith must have strong tools.

Finally, this article is for reference only and not as investment advice. The market is risky and you should be cautious when entering the market.