With interest rate cuts coming, can cryptocurrency rise in the financial storm?

Written by: WOO

On September 19, 2024, the Federal Reserve cut interest rates by 50 basis points (bps), bringing the federal funds rate to between 4.75% and 5%. Rate cuts are an important tool used by the Federal Reserve to stimulate the economy during economic slowdowns or recessions. Let's follow WOO X Research to see what impact rate cuts will have on cryptocurrencies in the next stage.

美联储降息意味着基准利率的降低，这通常会对经济产生一系列重要影响。如借贷成本的降低可以鼓励企业和消费者增加贷款，从而刺激投资和消费；或者说降息有助于推动经济增长，因为更容易获得信贷会促进市场需求的提升。降息可能会影响通货膨胀，因需求增加而推动物价上涨。同时，降息通常也会导致股票和房地产等资产价格上涨，投资者寻求更高的回报。此外，降息还可能导致本币贬值，因为投资者会转向更高收益的其他货币资产。总体而言，美联储当前下调 50 个基点（bps）的背后，体现出美联储对美国经济状况的担忧，可能已经有经济衰退的迹象。而对于加密货币市场来说，降息是自比特币减半后，市场最关注的利好消息之一了，利率下调，投资者可能会更愿意参与其他的资产投资。

Background (trends before and after historical interest rate cuts)

Judging from various economic indicators, the current economic situation shows a lot of downside risks, and interest rate cuts are needed to stimulate growth. The current value of the manufacturing PMI is 47.9, which is in the contraction range, indicating weak manufacturing activities; although the service PMI is 55.7, it is lower than the historical average. In addition, the current value of the unemployment rate is 4.2, and the year-on-year CPI and PCE are 2.5 and 2.6 respectively, which are lower than the historical average, indicating weak demand. More noteworthy is that the 10-year and 1-year US Treasury credit spreads are -0.2, which is usually a sign of economic recession, while the financial conditions index is -0.56, indicating that financial conditions are tightening, which may further suppress economic activities. Against this data background, the Federal Reserve announced a 50 basis points (bps) interest rate cut. Lower interest rates encourage investors to invest their funds in investment activities with higher returns, which has a boosting effect on the investment market; but a large amount of funds flowing into the market will have to face the risk of inflation and the possibility of instability in the economic system.

Data Trends

In the context of interest rate cuts, fighting against the inflation that may be caused by interest rate cuts is an issue that people need to seriously consider. In the past, people often chose gold as a hard currency to fight inflation. But as the cryptocurrency market enters the field of vision of more and more investors, BTC, known as "digital gold", is attracting more and more attention, especially after the approval of the BTC spot ETF, which provides investors with a more secure investment method.

Comparing the price trends of BTC (digital gold) and gold (traditional safe-haven assets), we can find that the two trends are strongly correlated, and the changes in BTC prices have a certain lag in time relative to the changes in gold prices, usually 2-5 months later than the changing trend of gold prices.

Gold and major stock indices (General & Poor's Index, Nasdaq 100 Index) are mainly negatively correlated. When the economic market is turbulent, gold can serve as a hedge and preserve value.

In the past six months, Bitcoin has been showing a risk-averse trend similar to gold.Xiaobai Navigation, that is, there is a weak correlation and inverse correlation with mainstream stock market indicators. And in the case of the same risk-averse properties, Bitcoin can achieve higher returns for risk-averse investors.

Possible future trends?

The United States is the world's largest and most developed economy, and the Fed's decision to cut interest rates is not only the United States' economic policy, but also a reference for other countries. The Fed's 50 basis points (bps) interest rate cut also expresses that the current economic situation cannot be too optimistic. From the previous data, we can see that before the interest rate cut, gold fluctuated and rose by a large margin. After the announcement of this interest rate cut, BTC and other cryptocurrencies may usher in a correction, but there are not enough positive factors in the later period. Due to concerns about economic recession, the market may easily fall into a state of turmoil.

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