Will the price of Bitcoin rebound with interest rate cuts in the United States?

Many investors expect the US Federal Reserve (central bank) to cut interest rates over the summer. The relationship between banking and the most popular cryptocurrency, Bitcoin, has long been the subject of debate. Especially in the context of its representation as a hedge against inflation.

The question now is: what is the impact of falling interest rates on... Bitcoin BTC Price?

The relationship between Bitcoin and traditional markets

In the past, Bitcoin has shown a correlation with stock markets. It also showed a negative price reaction in response to rising interest rates in the fight against inflation, as well as stocks. As of March 16, 2022, the Federal Reserve has moved away from its zero interest rate policy.

During 2022 and 2023, the Federal Reserve rapidly raised the target range for the federal funds rate until on July 23, 2023, the rate reached its current range of 5.25% to 5.50%.

During this period, Bitcoin was trading in a lower range from its highs. Although it gradually came out of a low of around $15,000 after the news Bankruptcy of the FTX platform Reaching a tepid recovery level of around $30,000 during the last interest rate hike by the Federal Reserve.

Bitcoin was only able to grow under a zero interest rate policy and slight interest rate hikes ahead of the 2022 rush to curb inflation. The COVID-19 pandemic and subsequent panic ensured that interest rate targeting remained around zero throughout the critical phases of the pandemic, allowing Bitcoin to continue to grow in the environment of low interest rates to which he had become accustomed despite an unsuccessful attempt to increase interest. rate again before the pandemic.

Read also: Why you should watch Fed interest rates in 2024

Analyzing the situation at that time, it seems that the conclusion seems to be that of short-term price fluctuations trending downward. But the long-term potential looks okay.

Factors Affecting Bitcoin Price

Many factors always come into play in Bitcoin pricing: typically, major events such as adoption by a country, approval of ETFs, banning of cryptocurrencies by countries, and failure of external exchanges or child care plays a role in the mix.

There is always a tension between supply and demand, and as a peer-to-peer market, there is not necessarily an external force supporting the system. There may be larger buyers, such as countries and publicly traded U.S. companies. But they are not bound by Bitcoin other than their belief in its mechanics and reliability.

This is the opposite of the world of traditional currencies: for example, the European Central Bank (ECB) has bought so much European sovereign debt that in 2022, it is estimated at “only 40%” of the sovereign debt of the zone euro.

In the world of traditional currencies, there are many forced buyers, but few forced sellers. With Bitcoin, it's the opposite: no one is forced to buy Bitcoin. But there have been bankruptcies of leveraged services like Celsius and BlockFi that have made them forced sellers, which may explain why some ETF inflows are causing some downward pressure on the Bitcoin price.

Possible repercussions of a drop in interest rates

If the Federal Reserve lowers interest rates, it will play a role in the current supply and demand dynamics. The Fed is also likely to set an example for central banks around the world.

Debt buying and targeting lower interest rates will be designed by central banks to incentivize people to buy and take advantage of loans and debt. Risk-prone assets like stocks, however, are expected to boom. Propaganda for artificial intelligence (The AI) that drives it could meet an inevitable end at some point, given the amount of revenue generated relative to the amount invested in infrastructure (however, the market may remain "irrational" longer than you can stay liquid, of course). Bitcoin could also rise, given its history of correlation with stocks.

It may also give people an easier way to get in and out of stocks now that spot Bitcoin ETFs are popular, so perhaps the relationship with booming stocks and tech stocks could strengthen.

Unexpected fluctuations

With Bitcoin, there is a lot of volatility caused by the system itself. There will also be the results of the halving event, with prices generally expected to rise 6-18 months after the halving itself if history repeats itself (which is not a reliable guide for Bitcoin, but perhaps a general indicator).

Besides, there are always unexpected surprises, perhaps one or two trading platforms or a service with huge financial assets may fail. Despite what models might say about a power law, or law of nature, that makes Bitcoin inevitable, markets certainly operate in ways that often defy precise prediction.

However, the possibility of multiple price declines could create a favorable pricing environment, perhaps providing a different price range than the current environment for rapid price increases, and multiple approvals for ETFs being behind most of the price movement.

In the short term, lower interest rates will likely benefit all risk assets, including Bitcoin. In the long term, this will also create a comparison of the Bitcoin model with that of traditional currencies.

Central banks tend to cut interest rates and increase the money supply at the first signs of real economic problems, proving why scarce, distributed money rather than arbitrary dictates that serve the few will be beneficial to as many people as possible.

The article is translated and adapted from the Forbes site.
Source : here