Amid the Fed’s interest rate cut, can Bitcoin seize the opportunity to rise?
There is a strong correlation between the price trends of Bitcoin and gold, and the price changes of Bitcoin usually lag behind those of gold by 2-5 months, showing its safe-haven properties.
Original title: "Interest rate cut is coming! Can cryptocurrency rise in the financial storm?"
Original source: WOO Research
On September 19, 2024, the Federal Reserve cut interest rates by 50 basis points (bps), lowering the federal funds rate to between 4.75% and 5%. Interest rate cuts are an important tool used by the Federal Reserve to stimulate the economy during economic slowdowns or recessions. Let's follow WOO X Research to see what impact interest rate cuts will have on cryptocurrencies in the next stage.
The Fed's interest rate cut means a reduction in the benchmark interest rate, which usually has a series of important effects on the economy. For example, lower borrowing costs can encourage businesses and consumers to increase loans, thereby stimulating investment and consumption; or interest rate cuts can help promote economic growth because easier access to credit will promote market demand. Interest rate cuts may affect inflation, driving up prices due to increased demand. At the same time, interest rate cuts usually lead to higher asset prices such as stocks and real estate, as investors seek higher returns. In addition, interest rate cuts may also lead to a depreciation of the local currency as investors turn to other monetary assets with higher returns. Overall, the Fed's current 50 basis point (bps) cut reflects the Fed's concerns about the state of the US economy, and there may already be signs of an economic recession. For the cryptocurrency market, interest rate cuts are one of the most concerned good news in the market since the Bitcoin halving. With interest rate cuts, investors may be more willing to participate in other asset investments.
Background (historical trend before and after interest rate cuts)
From various economic indicators, the current economic situation shows a lot of downside risks, and interest rate cuts are needed to stimulate growth. The current value of the manufacturing PMI is 47.9, which is in the contraction range, indicating weak manufacturing activity; although the service industry PMI is 55.7, it has declined compared to the historical average. In addition, the current value of the unemployment rate is 4.2, and the year-on-year CPI and PCE growth rates are 2.5 and 2.6 respectively, which are lower than the historical average, indicating weak demand. More noteworthy is that the 10-year and 1-year US Treasury credit spread is -0.2, which is usually a sign of economic recession, and the financial conditions index is -0.56, which shows that financial conditions are tightening, which may further suppress economic activity. Against this data background, the Federal Reserve announced a 50 basis points (bps) interest rate cut. Lower interest rates encourage investors to invest their funds in investment activities with higher returns, which has a boosting effect on the investment market; but a large amount of funds flowing into the market will have to face the risk of inflation and the possibility of instability in the economic system.
Data Trends
In the context of interest rate cuts, fighting against the inflation that may be caused by interest rate cuts is an issue that people need to seriously consider. In the past, people often chose gold as a hard currency to fight inflation. But as the cryptocurrency market has entered the field of vision of more and more investors, BTC, known as "digital gold", is attracting more and more attention, especially after the BTC spot ETF was passed, providing investors with a more secure investment method.
Comparing the price trend of BTC ("digital gold") and the price trend of gold (traditional safe-haven assets), it can be found that the two trends are strongly correlated, and the change in BTC price has a certain lag in time relative to the change trend of gold price, usually 2-5 months later than the change trend of gold price.
Gold and major stock indices (General & Poor's Index, Nasdaq100 Index) are mainly negatively correlated. When the economic market is turbulent, gold can be used for hedging and preservation.
In the past six months, Bitcoin has been showing a similar hedging trend to gold, that is, it is weakly correlated and inversely correlated with mainstream stock market indicators. And with the same hedging properties, Bitcoin can achieve higher returns for investors who invest in hedging.
Possible future trends
The United States is the world's largest and most developed economy, and the Fed's decision to cut interest rates is not only the economic policy of the United States, but also a reference for other countries. Behind the Fed's 50 basis points (bps) interest rate cut, it also expresses that the current economic situation cannot be too optimistic. From the previous data, we can see that before the rate cut, gold fluctuated and rose by a large margin. After the announcement of the rate cut, BTC and other cryptocurrencies may see a correction, but there are not enough positive factors in the later period. Due to concerns about economic recession, the market may easily fall into a turbulent state.
This article comes from a contribution and does not represent the views of BlockBeats.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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