The same applies to the cryptocurrency market. This article will review BTC’s performance during different monetary policy periods to reflect the impact of interest rate hikes and cuts on cryptocurrencies.

The Impact of Interest Rate Hikes and Cuts on Cryptocurrencies

Historical trend of the federal funds rate

Although the federal funds rate has seen significant hikes and cuts throughout history, when considering the inception of BTC, it has only been affected by three main periods: the gradual rate hikes from 2015 to 2018, the rate cuts in 2019 to 2020 due to the COVID-19 pandemic, and the hawkish rate hikes from 2022 to 2023.

This article interprets the changes in the cryptocurrency market during these three periods, presented in reverse chronological order, for easier understanding and analysis.

Hawkish Interest Rate Hikes from 2022 to 2023

2022-2023 Fed Rate Hike Path vs. BTC Trend

The recent interest rate hike was implemented to address the inflationary pressures resulting from the rate cuts during the COVID-19 period. Due to the speed of these cuts and the prolonged duration of low interest rates, the U.S. CPI data once reached 9.1%. This led to a rapid and substantial pace of the current rate hikes. The red arrows in the chart indicate the timing of the rate hikes in this cycle, with their length representing the magnitude of each increase.

It is clear that BTC’s price went through three phases during the rate hike process:

Phase One: November 2021 to March 2022. After Powell indicated at the November FOMC meeting that he would adopt a tightening policy similar to the Volcker era, market expectations led to a sharp decline in the cryptocurrency market. BTC dropped significantly from its historical high to around $40,000, declining nearly 40% over five months.

Phase Two: March 2022 to December 2022. This phase marked the primary rate hike period, during which BTC’s price reached its bottom. A notable feature of this stage was that, despite several substantial 75-basis-point rate hikes occurring in mid-2022, the rate of BTC’s price decline gradually slowed. Instead of sharp drops, the price exhibited a more volatile downward trend.

Phase Three: December 2022 to July 2023. During this period, the intensity of the rate hikes was mostly maintained at 25 basis points, resulting in a more moderate approach. BTC began to rebound during this time as market sentiment started to anticipate the end of the tightening monetary policy.

By examining the trends of BTC, it is evident that this entire rate hike cycle has distinct phases of excess and transition. Before the rate hikes began, the uncertainty of market expectations led to the most intense price fluctuations. Once the rate hikes started, even with significant increases, the rate of decline slowed down.

The Rate Cuts from 2019 to 2020 were Influenced by the Impact of COVID-19

The rate cut path from 2019 to 2020 compared to BTC trends.

Although referred to as the rate cuts to mitigate the effects of COVID-19, the primary reason for this round of cuts was to macro-manage the weak economy. It was only in the later stages of the rate cuts that the impact of COVID-19 led to a collapse in the labor market, prompting the Federal Reserve to significantly lower interest rates.

This cycle also has three stages:

In the first stage, before July 2019, the Federal Reserve announced the possibility of a rate cut to manage market expectations. Although the rate cut policy had not been implemented, BTC rebounded, rising from around 4,000 to 10,000.

The second stage involved three actual rate cuts in July, September, and October 2019. These cuts were implemented against economic weakness caused by the Federal Reserve’s long-term mild rate increases, with each cut being 25 basis points. During this time, BTC’s price did not rise due to the rate cuts; instead, it exhibited a corrective trend, a typical case of “sell the news.”

The third stage began with aggressive rate cuts to rescue the labor market devastated by COVID-19. In early March 2020, the Federal Reserve urgently cut rates by 50 basis points, followed by a 100-basis-point cut at the March FOMC meeting. During this period, BTC also experienced a panic-induced drop amid the COVID-19 outbreak. However, in the second week following the 100-basis-point cut, BTC began to rise and broke through its previous highs in Q4 of the same year, experiencing a significant surge.

In this round of rate cuts, the most significant impact on BTC’s trends still comes from the expectations surrounding monetary policy, largely due to the Federal Reserve’s groundwork. The actual implementation of policies had minimal effects. The subsequent significant rise was more a result of the signals released by the Federal Reserve in response to the COVID-19 shock, particularly after two aggressive rate cuts, leading people to expect that monetary policy would remain in a loose state for an extended period.

Phase Summary

After reviewing the two cycles mentioned above, we can preliminarily draw several conclusions:

1. Mild changes in monetary policy have little impact on the market.
2. Changes in monetary policy under thorough preparation by the Federal Reserve have minimal market impact.
3. Market uncertainty about the future often leads to volatility before implementing monetary policy.

Mild Rate Hikes from 2015 to 2018

The rate hike path from 2015 to 2018 compared to BTC trends

The backdrop of this round of rate hikes is a strong labor market and low inflation data. The Federal Reserve aims to regulate monetary policy to raise the inflation target to 2% and maintain dual healthy economic and labor market development. The overall rate hike cycle lasts three years, with rates increasing from 0.125 to 2.375. The Federal Reserve has effectively communicated its rate hike objectives and path to the market.

Based on the analysis of the previous two cycles, it is not difficult to understand why this rate hike cycle did not lead to a market downturn. The core reason lies in the Federal Reserve’s thorough groundwork and the overall mild magnitude of the hikes.

At that time, the cryptocurrency market was an extremely niche asset with low liquidity, making it inherently less affected by monetary policy. Additionally, with the birth of Ethereum in 2015, BTC experienced a rise contrary to monetary policy during this honeymoon period.

After analyzing the three historical cycles, let’s predict the potential impact of the upcoming rate cut cycle on BTC. In this process, we will not discuss random events such as those brought about by COVID-19.

Possible Trends During the 2024 and Onward Rate Cut Cycle

CME’s predictions for the future rate cut path.

The background of the current rate cut cycle is to mitigate the negative effects that hawkish rate hikes have had on the labor market and the economy. According to current CME data, following a 50 basis point cut in September, an additional 75 basis points are expected to be cut in 2024, bringing the rate down to 300-325 before Q4 2025. This spans nine months, with a total cut of 225 basis points, averaging 25 monthly basis points. This rate is higher compared to the previous rate cut cycle.

However, BTC’s price has already risen to levels seen before the last round of rate hikes, influenced by factors such as the BTC ETF and the upcoming halving. Before the September FOMC meeting, the market showed no clear preference for whether to cut by 25 or 50 basis points, so the outcome slightly exceeded expectations.

Furthermore, market predictions indicate that most of the significant rate cuts will occur in Q4 2024, with 2025 expected to see mainly gentle cuts of 25 basis points. Based on historical patterns, this portion is unlikely to significantly boost BTC’s price.

CME’s predicted rate cut path

In summary, the increase in BTC due to interest rate cuts is likely to manifest in Q4, followed by a potential consolidation period. During this process, if labor market weakness exceeds market expectations, prompting the Federal Reserve to implement unexpected rate cuts, it could lead to a significant increase in BTC in the short term.

It is important to note that this analysis is merely an extrapolation based on the historical impact of monetary policy on BTC and does not constitute investment advice. In the current environment, factors such as BTC ETFs, BTC halving, emerging industry trends, and regulatory developments will all play critical roles in influencing BTC.