Cryptocurrencies, led by Bitcoin, may be set for a strong recovery as central banks, particularly the U.S. Federal Reserve, prepare to ease monetary policy, according to market analysts.
The anticipated rate cuts are expected to inject fresh liquidity into financial markets, boosting risk assets like equities and crypto despite current market uncertainties.
Still, analysts are advising traders to take a measured approach with the U.S. presidential election in November and ongoing uncertainties in fiscal policy. Though broader sentiment points toward a cautiously optimistic outlook for the crypto market as the world’s central banks pivot toward easing, analysts say.
That’s welcome news for market observers who, on late Tuesday, witnessed a drop in blue-chip cryptos, which saw liquidations for positions betting on higher prices spike above $170 million.
Bellwether crypto Bitcoin is down about 6% from its drop on Tuesday to $59,200, per CoinGecko data.
On Tuesday, QCP Capital emphasized that any dip in equities and crypto will likely be "short-lived" as the Fed stands ready to kickstart a rate-cutting cycle.
Last week, U.S. Federal Reserve Chairman Jerome Powell hinted the central bank could begin cutting interest rates as soon as next month with the market pricing in three rate cuts this year.
"Increased liquidity will eventually push risk assets higher,” the Singapore-based digital asset trading firm wrote in an investor note. “We are finally on the cusp of a rate-cutting cycle."
That sentiment is echoed by analysts at blockchain analytics platform Nansen, who highlighted the potential for a continued bullish trend in the crypto market, underpinned by what they describe as the "Fed put."
The term refers to the belief that the Federal Reserve will intervene to support the economy and financial markets, particularly as inflation cools and growth stabilizes.
"The crypto bull regime has not been questioned yet," Nansen stated in a Tuesday report, adding that the "most bullish driver is the 'Fed put' occurring in the context of weaker but not recessionary growth."
Despite the optimistic outlook, Nansen cautioned that elevated equity valuations could pose a risk to the crypto market, creating what they describe as an "asymmetry to the downside" for risk assets.
In simple terms, it means that while the crypto market is looking positive, there's a concern that stocks are currently priced too high. If stock prices drop, it could negatively affect the crypto market more than it might benefit from rising stock prices.
However, the report suggests that the current economic conditions still favor a measured approach for investors, advising them to "trim the allocation to crypto on rallies and focus on majors," which include Bitcoin and Ethereum.