Steno Research highlights that Bitcoin has limited experience with rate-cutting cycles, having truly only navigated one that started in 2019. During that cycle, Bitcoin’s price declined by about 15% between the Fed’s initial rate cut in August and the end of November, despite the Fed trimming rates by 75 basis points. It wasn’t until the massive Covid-era monetary stimulus in March 2020 that Bitcoin finally bottomed out and embarked on its meteoric rise.
The anticipation is building as Steno Research states, “It is becoming increasingly clear that the first U.S. interest rate cut is just around the corner.” The Federal Open Market Committee (FOMC) meeting on September 18 will determine the Federal Reserve’s (FED) next move on U.S. Dollar interest rates.
While a 25 basis point reduction is highly likely, with an 87% probability assigned by the market, the chances of a 50 basis point cut have diminished following a slightly higher-than-expected U.S. Consumer Price Index (CPI) release.
The impact of U.S. interest rates on the crypto market is significant, directly influencing investor risk appetite. Central bank rates, including those set by the FED, establish the baseline for expected returns, essentially the closest thing to a risk-free return. If the FED’s rate is 5%, investors are less likely to invest in digital assets unless they anticipate significantly higher returns, given the inherent risks associated with crypto.
Steno Research’s Principal Component Analysis (PCA) model further underscores the negative impact of rising global yields on Bitcoin and Ethereum prices. However, it is crucial to recognize that interest rates are intertwined with other market factors, such as U.S. equity performance and corporate credit risk. Lower interest rates tend to improve these factors, ultimately benefiting Bitcoin, Ethereum, and the broader crypto market.
