All Eyes on the Fed: What Rate Cuts Could Mean for Bitcoin

Wednesday is poised to be a huge day for the markets. America’s central bank is expected to finally slash interest rates from their 23-year high after hiking them up in 2022, and the resulting impact could have wide implications across all major markets.

Under Chair Jerome Powell, the Federal Reserve raised borrowing costs in a bid to control inflation, which skyrocketed following the Covid-19 pandemic. Now, with a stronger job market, the plan is to lower interest rates—hopefully without triggering a recession in the process. 

Markets are expecting interest rates to drop Wednesday following the Federal Open Market Committee (FOMC) meeting, which begins today and concludes Wednesday. 

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What does this have to do with crypto, though? And why is everyone talking about this meeting? 

Bitcoin and other cryptocurrencies have largely benefited from low interest rates because they are “risk-on” assets. Such investments—which also include U.S. equities like tech stocks—have more volatile price movements.

But in 2022, the central bank aggressively hiked interest rates, making other places to put money—such as bonds or treasury bills—more attractive. 

The crypto market has largely moved with U.S. equities—especially now. K33 Research said that the 30-day correlation between Bitcoin and the S&P 500 is now at levels not seen since October 2022.

It appears that digital assets are more sensitive to Fed policy than ever before—and this is why the crypto world is so focused on what happens Wednesday. A rate cut would mark a “pivot” in monetary policy that could boost crypto, said Jake Ostrovskis, OTC trader at crypto trading firm Wintermute.

“Historically, such a move increases liquidity in the financial system, which tends to benefit risk-on assets like Bitcoin,” he told Decrypt.

In other words, the more investors that are willing to take risks, the more money they’ll want to put into the space—which could cause the price of digital assets to rise. 

The other thing analysts are focused on is just how big the cut will be. Markets have priced in a cut—but the difference between a 25-basis point and a 50-basis point reduction could make a big difference. 

Bitcoin Price Nears $60,000 as Traders Anticipate Jumbo Rate Cut

The price of Bitcoin rose Friday, hitting its highest mark since the start of September as traders grew more confident that the Federal Reserve’s upcoming meeting would yield a jumbo-sized rate cut. With Bitcoin’s price nearing $60,000—reaching as high as $59,735 per CoinGecko, up 2.5% on the day—the increase represented a reversal of September losses seen as government data stoked worries of a weakening U.S. economy. For example, Bitcoin fell as low as $53,300 a week ago after a weaker-than-exp...

“Correlations between cryptocurrencies and broader risk assets are at an 18-month high, prompting crypto investors to pay closer attention to these economic trends,” FalconX Head of Research David Lawant told Decrypt.

He added that a surprise 50 basis-point cut could give risk assets an “unexpected boost.”

On Monday, Senator Elizabeth Warren—one of the biggest crypto critics in Congress—joined two fellow Senators in pushing for a 75-basis point cut in a letter to the Fed Chair. Her reasoning was that anything less could trigger a recession.

Bitcoin Critic Elizabeth Warren Urges Fed Chair to Make Massive Rate Cut

Senator Elizabeth Warren is pushing the Federal Reserve to lower interest rates dramatically this week, with the outspoken crypto critic arguing that higher borrowing costs have threatened the U.S. economy for too long. “Now is the time to swiftly move forward with rate cuts,” the Senator from Massachusetts wrote in a letter addressed to Fed Chair Jerome Powell. The letter was also signed by Senators John Hickenlooper (D-CO) and Sheldon Whitehouse (D-RI). In the letter, lawmakers called for a 75...

Youwei Yang, Chief Economist at mining firm BIT Mining Limited, said that “the magnitude of the rate cut” could significantly impact “market liquidity, investor sentiment, and the relative attractiveness of these assets.”

But Ostrovskis said that the immediate size of the cut was less important than the “longer-term rate outlook,” including how long the cutting cycle is expected to last and the committee’s view on the labor market. 

All eyes on Powell, then.

Edited by Andrew Hayward