How Does FED Rate Cut Influence Bitcoin Volatility?

Intermediate

2024-09-23

The dust has settled temporarily for the crypto market as a decision of a 50 basis point rate cut has been made by the U.S. Federal Reserve.

After the price of Bitcoin fell sharply from $65,000 in late August to around $58,000 in early September, the market is expected to usher in more turbulence. The outcome of the FED's meeting, which triggered a rate cut, is likely to determine the short-term direction of the Bitcoin-to-dollar exchange rate, but what makes the market uncertain is the potential for deeper economic instability.

Most investors expected a 25 basis point rate cut, but the more aggressive 50 basis point rate cut is likely to trigger greater market volatility. As the global economy struggles under the weight of central bank mismanagement and market distortions, investors who use Bitcoin as a hedge against currency debasement may face a test of confidence.

Impact of FED Rate Cuts on BTC

Historically, rate cuts have been seen as bullish for Bitcoin, as monetary easing tends to weaken the dollar and boost demand for assets. But this rate cut in 2024 could be a double-edged sword. After embarking on an aggressive rate hike cycle in 2022 to curb inflation, the FED is now being forced to pivot as economic conditions deteriorate. This is to be expected in a financial system that relies on continuous liquidity injections. For Bitcoin, although it has historically benefited from monetary easing, the FED's decision could have unexpected consequences. As an alternative to fiat currencies, Bitcoin excels especially when currencies are devalued. However, the aggressive 50 basis point rate cut introduces a factor that market participants may not have fully considered: concerns about an impending economic slowdown or recession. If the FED signals deeper economic concerns, institutional and retail investors may shy away from assets that they perceive as riskier, such as Bitcoin.

Does a 50 Basis Point Cut Reflect Deeper Problems?

Concerns about a 50 basis point rate cut stem from the broader macroeconomic backdrop, with the FED's emergency rate hikes in 2022 aimed at curbing inflation but also exposing underlying weaknesses in the economy - weaknesses that are now surfacing in the form of a slowing labor market. The latest jobs report was another chapter in a multi-year underperformance of the U.S. labor market. Until now, that trend has been obscured by exaggerated reports that have been repeatedly revised down after their initial release. The most recent report inevitably showed signs of labor market weakness when it was released, with the Bureau of Labor Statistics’ household survey showing that the unemployment rate had not improved in the past month and that the number of unemployed people had increased over the past year. That means the labor market has been so weak that the weakness can no longer be hidden. In addition to this, the intense presidential election season in the United States brings uncertainty about the outlook for economic policies that could hurt investment and economic growth.

Closing Thoughts

Bitcoin’s correlation with global economic conditions has “multiple personalities” that make its price movements difficult to predict. In some cases, such as the early days of the war in Ukraine, Bitcoin has behaved as a risk-off asset, while in other cases, such as the early days of the COVID-19 outbreak, it has behaved as a risk-on asset. What is clear, however, is that central banks’ attempts to paper over cracks in the rules-based order by pooling liquidity will only serve to highlight Bitcoin’s long-term advantages.