Bybit x 10x Research presents you our view on the impact from upcoming Fed rate cuts.

Markus Thielen, Founder and CEO of 10xResearch

Bitcoin's Lessons From the Fed's 2019 Rate Cuts

Markets are eagerly anticipating Fed Chair Powell’s speech on Friday, August 23, at Jackson Hole. He’s expected to signal that the Federal Reserve is prepared to cut interest rates at its upcoming September 18, 2024 meeting. This decision would follow one of the longest periods in recent history during which the Fed raised rates, paused for an extended duration and shifted to a more accommodative monetary policy.

Given Bitcoin's relatively short 15-year history, there are few historical parallels to draw from when comparing its performance during near-zero interest rates, such as those seen after the Global Financial Crisis of 2007-2008. However, the last time monetary policy followed a similar path with the Fed adopting a wait-and-see approach, Bitcoin experienced significant gains. This suggests that Bitcoin performs strongly when the Fed pauses its tightening cycle.

After consistently raising rates throughout 2018, the Fed’s decision to hold the federal funds rate steady at its Jan 30, 2019 meeting marked a pivotal shift in monetary policy. This pause reflected the Fed’s more cautious response to growing economic uncertainties and concerns over slowing global growth, signaling a move from aggressive tightening toward a more measured approach.

On Jul 31, 2019, the Fed lowered the federal funds rate, which fueled a 169% surge in Bitcoin prices from the Fed's pause in January 2019 to this first rate cut in July. Fed Chair Jerome Powell attributed the rate reduction to global economic uncertainties, muted inflation, a mid-cycle adjustment and the desire to support ongoing economic expansion.

Exhibit 1: Bitcoin in 2018–2020 (LHS) vs. U.S. Interest Rates (RHS)

Although Bitcoin initially jumped 20% following the Federal Reserve's rate cut, this rally was short-lived, as prices declined. Despite the Fed implementing two additional rate cuts later in the year, Bitcoin ended 2019 down 35% from its peak following the first rate cut.

What This Could Mean for Bitcoin in 2023–2024

Similarly, after the Fed's final rate hike in July 2023, Bitcoin was trading at around $29,300, and has since more than doubled in value. However, it's important to consider the less optimistic scenario when the Federal Reserve begins cutting interest rates. Traders need to understand the underlying reasons behind the rate cuts, as the context for such decisions can significantly influence market reactions.

This experience underscores the Fed's decision to cut interest rates in 2019, driven by low inflation, broader economic uncertainties and the need to support ongoing economic growth. 

Unlike in 2019, Powell may now stress that, while inflation remains above the Fed's 2% target and monetary policy remains restrictive, a modest 25 basis point (bps) interest rate cut could still be considered. This stance, shy of a 50 bps cut, could raise concerns and send a negative signal to markets. Just as in 2019, Bitcoin could initially surge following a rate cut announcement, only to quickly lose those gains as economic uncertainties mount.

Investors should pay close attention to Powell's statements, and track economic data carefully. A data-dependent Fed will likely wait to see how incoming information influences interest rate decisions at upcoming meetings. Savvy investors can position themselves strategically ahead of these rate meetings, use their judgment to anticipate market trends and adjust their strategies accordingly.

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Bybit x 10x Research — Bitcoin Braces for Fed Chair Powell's Speech on Rate Cuts

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It’s challenging to stay on top of all the events and news influencing Bitcoin prices. The Bitcoin rally lost momentum in July when President Biden was replaced as the Democratic nominee on July 21, 2024, reducing the election odds for the crypto-friendly contender Trump. Polls indicate a close race between the Democrats and the perceived crypto-friendly Republicans, causing rising Bitcoin volatility.

Additional selling pressure from market makers and crypto funds was observed on Monday and Wednesday, adding to the liquidation concerns for Ethereum. Bitcoin Spot ETFs have seen continuous outflows, with no significant stablecoin inflows, raising alarm about the market's direction. Although stablecoin issuer Circle received $1.5 billion in inflows this week, it also had outflows of $1 billion the week before, resulting in only marginally stronger inflows overall. Without significant stablecoin inflow, Bitcoin and crypto markets are perhaps being driven purely by macro data points and the correlation with technology stocks.

Exhibit 1: Bitcoin (LHS) vs. Nasdaq (RHS)

Even if the hype around the carry trade fades, the downside risk for the Nasdaq remains, potentially affecting Bitcoin’s price due to increasing Bitcoin/Nasdaq correlations.

Additionally, the selection of Trump's candidate for vice president, who is perceived as anti–Big Tech, adds to the uncertainty. Political headwinds could impact tech stocks and the crypto tech sector. Economic uncertainty, inflation concerns and potential interest rate cuts will persist until September of this year.

On Tuesday, Bitcoin attempted a rebound but faced strong resistance at $56,000–$57,000, following the Bank of Japan's pause on rate hikes as it assured investors during its press conference. The potential downside risk for Nasdaq remains, and Bitcoin could see further declines.

Recent earnings reports from major U.S. tech companies have prompted investors to reassess their positions. Weak margins from companies like SMCI and Google's 5% decline in network advertising indicate economic strain. Additionally, weak U.S. consumer credit data, driven by negative credit card debt and soaring delinquencies, suggests a collapsing personal savings rate, impacting the fiat-to-crypto onramp.

Comparisons to the 2020–21 bull run should consider the absence of Covid stimulus checks, which previously fueled crypto trading. 

Historically, there’s a 44% chance of a U.S. recession in the first year of a new presidency, based on data collected since 1900, which could negatively impact stock prices and economic data. Despite declining consumer spending and advertisement revenue, the Fed's latest actions have signaled an acknowledgment of reduced inflation.

Upcoming vital events — including reports for the CPI on August 14, NVIDIA earnings on August 28, ISM

 on September 2 and labor market on September 6 — along with Fed Chair Powell’s speech at Jackson Hole on August 22–24 — will be critical in setting market expectations.

Traders are expected to closely monitor these events for signs of a potential price reversal, and to gauge the continuation of the Bitcoin bull market.

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Bybit x 10x Research — Bitcoin Braces for Fed Chair Powell's Speech on Rate Cuts

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