The Bullish Fed Rate-Cut Play in Bitcoin (BTC) Is Not as Straightforward as You Think

At first glance, a Fed interest-rate cut appears to be a bullish signal, but that's not necessarily true.

The Federal Reserve (Fed) might start cutting interest rates this year, following Friday's inflation report. Crypto traders are betting that the move will boost fiat liquidity, driving demand for riskier assets like bitcoin (BTC). However, that might not be a straightforward bullish play.

Here's why: A rate cut might stimulate asset prices if it arrives at a time of low inflation and a booming economy. One that takes place amid signs of economic weakness could convey a bearish signal, prompting investors to rotate money out of riskier assets and into safer ones, such as government bonds.

"If the Fed cuts rates in September 2024 due to inflation concerns, it could be short-term bullish for bitcoin," Markus Thielen, founder of 10x Research, said in a note shared with CoinDesk. "However, if growth concerns drive the cut, either in September or later, bitcoin might face significant selling pressure."

Historically, bitcoin has gained the most when the Fed pauses its cycle of rate increases, Thielen noted. The arrival of the first cut has usually met with a tepid response.

"During the Fed's pause from rate hikes until July 2019, bitcoin experienced explosive growth, returning +169%. Following a seven-month pause in 2019, the Fed cut interest rates, initiating a steep rate-cutting cycle. Initially, bitcoin responded positively, rallying +19% within a week after the July 31, 2019, rate cut. However, two weeks later, Bitcoin was back to flat," Thielen said.

Thielen added that the rate cuts in the second half of 2019 were driven by economic uncertainties and weighed on BTC's price. The cryptocurrency's price fell 33% in the second half of the year, CoinDesk data show.

U.S. stocks show a similar pattern.

"The arrival of a Fed rate cut cycle has tended to coincide with a sizable stock-market drawdown,” Austin Pickle, a strategist at Wells Fargo Investment Institute, said last month, according to MarketWatch. “Since 1974, the average drawdown has been roughly 20% over 250 days following the first Fed rate cut.”

Pickle added that the stock market would suffer if the Fed is forced to cut rates in response to macro weakness.

That means crypto traders should be watching for signs of weakness in the U.S. economy.

According to Fidelity's business cycle tracker, the U.S. economy was in the late stage of expansion at the end of the second quarter. Leading indicators like new orders for consumer goods and materials, consumer sentiment and building permits signaled weakness ahead. Should the weakness become more pronounced in coming months, a rate cut will do little for risk assets, including BTC.