The crypto market in August entered a “monkey market,” characterized by erratic swings, resembling a mischievous monkey jumping up and down within a wide range of fluctuations. In September’s macroeconomic policy landscape, the Fed’s expected rate cut is garnering significant attention. If the Fed decides to cut rates on September 19, it will impact financial markets, including cryptocurrencies, with Bitcoin being the most prominent. Is this a booster for the market or a “Sword of Damocles” hanging in mid-air? Let’s look back at history to learn from past experiences.

Purpose and Background of Rate Cuts

Before examining past cases, we should first understand the purpose and background of Fed rate cuts. A Fed rate cut refers to a reduction in the federal funds rate, which is the benchmark rate for interbank lending in the United States. A rate cut means lower borrowing costs, making it easier for businesses and individuals to obtain loans, thereby stimulating economic activity. As an important tool for regulating the economy, the goal of a rate cut is to promote economic growth, increase employment, and control inflation by influencing market interest rates.
While a rate cut might seem like a big win, it’s not that simple in today’s financial market.
For the past two years, the United States has maintained high interest rates, not only to control domestic inflation but also to attract global capital, further solidifying its financial position. If the Fed decides to cut rates this time, it would indicate that this strategy has come to an end, and the U.S. will no longer be able to use high interest rates to attract global capital. As a result, the plan to attract global capital with high rates over the past two years would essentially be declared a failure. On the other hand, if the Fed decides to continue raising rates and maintain high interest rates, it would be standing against the global financial system. High rates would further exacerbate financial pressure in other countries, forcing them to seek new financial alternatives. The BRICS payment system is set to launch in October, offering a global alternative for payment and settlement. If more countries join this system, the U.S.’s financial influence will be significantly weakened.

Impact on the Crypto Market

Fed rate cuts typically help boost Bitcoin prices. Lower rates reduce the cost of capital, encouraging investors to put their money into high-risk, high-reward assets like Bitcoin. Upon careful analysis, several factors can be identified as stimulants:

• Investment Expectations: In a low-interest-rate environment, investors often seek higher returns by choosing risk assets like Bitcoin, driving up Bitcoin’s price.
• Market Sentiment: A rate cut aimed at stimulating economic growth signals positive Fed policy, making investors more willing to take risks, leading to more capital flowing into Bitcoin.
• Inflation Hedging: Rate cuts may lead to lower yields on traditional safe-haven assets, raising inflation expectations and enhancing Bitcoin’s role as a digital gold with anti-inflation properties. Many investors might view Bitcoin as a tool to combat inflation, thereby increasing its demand and price.
• Market Liquidity: The easing of monetary policy through rate cuts increases market liquidity, making it easier for investors to enter the market, pushing Bitcoin prices higher.
  However, it’s important to note that rate cuts do not necessarily lead to an immediate rise in the crypto market. In fact, in most cases, the market declines initially.
  The Fed’s monetary policy adjustments have profound impacts on the crypto market. Particularly in the early stages of a rate cut, although a rate cut is generally seen as a measure to stimulate economic growth, it also comes with a series of potential risks. This means that a rate cut doesn’t necessarily result in an immediate rise in risky markets like crypto; in most cases, the market tends to decline.

Historical Cases

From December 2018 to July 2019, BTC prices rose from $3,000 to $13,000. The market began responding to the rate cut expectations in April 2019, well before the Fed started cutting rates in July 2019.
During the period from July 2019 to March 2020, despite the Fed starting to cut rates, Bitcoin prices first fell and then rose. After the rate cut, Bitcoin’s price dropped from $13,000 to $7,000, a decline of over 30%.
In 2020, the Fed significantly cut rates in response to the pandemic, but Bitcoin prices did not immediately surge. The market experienced a slight lag, with the main upward trend beginning at the end of 2020 and early 2021. In this cycle, Bitcoin prices rose from $3,000 to $65,000.
During the rate hike cycle from March 2022 to July 2023, Bitcoin prices fell from $45,000 to a low of $15,000, experiencing a prolonged 9-month decline.

Is It Really Beneficial?

The Fed seems increasingly likely to start cutting rates in September, meeting the crypto bulls’ long-standing desire for a more risk-tolerant macroeconomic environment. The consensus in the cryptocurrency community is that rate cuts will increase fiat liquidity, catalyzing demand for riskier investments like Bitcoin. While this makes sense, the market may have already priced for the benefits of an easing policy.
Since the second half of 2022, rate cut expectations have dominated sentiment in both the crypto and traditional markets and have been one of the key catalysts for Bitcoin’s surge from its 2022 low of around $15,000 to its current historic high of over $73,000 this year. Therefore, the actual rate cut may only elicit a lukewarm response from the market. More important might be the context of the rate cut. If the rate cut occurs during a period of low inflation and economic prosperity, its stimulus effect on asset prices may be more pronounced. However, a rate cut amid signs of economic weakness might send negative signals, prompting investors to shift funds from riskier assets to safer ones like government bonds.
Markus Thielen, founder of 10x Research, noted in a report shared with CoinDesk, “If the Fed cuts rates in September 2024 solely due to inflation concerns, it could provide a short-term boost to Bitcoin.” However, “If growth concerns drive the rate cut, whether in September or later, Bitcoin could face significant selling pressure.” Thielen pointed out that historically, Bitcoin has seen the most significant gains when the Fed pauses its rate hike cycle. The first rate cut often triggers a tepid response. Thielen added that the rate cuts in the second half of 2019 were due to economic uncertainty and dragged down BTC prices, with CoinDesk data showing that crypto prices fell by 33% in the second half of that year.
So, if the Fed is forced to cut rates this time to counter macroeconomic weakness, both the stock market and cryptocurrencies will be affected. This means that crypto traders should be wary of signs of U.S. economic weakness.