With interest rates set to fall, could bitcoin and other cryptos see a surge in price?
Posted September 11, 2024 at 3:50 pm EST.
As the Federal Reserve prepares to potentially reduce interest rates, the crypto market is closely watching for the impact. Wednesday’s data from the Consumer Price Index (CPI), which came at 0.2% for the month of August, suggests inflation is cooling, which has led to speculation that the Fed could lower rates as early as at its meeting next week. For the crypto industry, this move could have significant implications.
“With annual inflation cooling down in line with expectations, we could see a recovery of investors’ appetite for risk-on assets like crypto, instigating more flows into bitcoin spot ETFs,” said Leena ElDeeb, research analyst at 21Shares, via email.
If the Fed decides to cut rates, it could inject more liquidity into the market, a development that some believe would benefit cryptocurrencies. Joe McCann, founder of crypto investment firm Asymmetric, noted that the Fed has considerable room to lower rates without destabilizing the economy, since the real interest rate, which takes inflation into account, is very high.
“The Fed can quite literally cut 200 basis points off the current rate and still be at a historical neutral rate,” McCann said in the latest episode of the Bits + Bips podcast.
Lower interest rates often lead to more risk-taking by investors, which could increase demand for crypto assets. However, the market reaction will depend on the size of the rate cut — most experts are anticipating a 25 basis point cut, but others say it could be as high as 50 points — and the Fed signals as far as its future monetary policy.
Currency Debasement Concerns
One of the potential long-term effects of continued rate cuts is currency debasement. Economist Noelle Acheson highlighted this concern during the Bits + Bips episode: “What we’re looking at is money printing and currency debasement from here on in,” she said. Acheson suggests that as governments continue to spend, there may be little choice but to print more money, which could weaken those traditional currencies.
This scenario could make cryptocurrencies, particularly bitcoin, more attractive to investors looking for alternatives to fiat currencies. Bitcoin has often been touted as a hedge against currency debasement, though opinions differ on its effectiveness in this capacity.
💸💸💸 “Governments around the world have no choice but to keep printing money. We’re looking at currency debasement from here on in,” says @NoelleInMadrid on @bitsandbips. 🔥🔥🔥🙈🙈🙈
What do you think?
🎧 Listen now: https://t.co/kbr5kqiso2 pic.twitter.com/OqqGOVSQvm— Laura Shin (@laurashin) September 11, 2024
Read more: Ether Has Been a Much Worse Investment Than Both Gold and Silver So Far This Year
Bitcoin: Safe Haven or Risk Asset?
The question of whether bitcoin is a safe haven or a risk asset remains a topic of debate. James Seyffart, an analyst with expertise in commodities, shared his insights on this issue, saying that “[BlackRock doesn’t] want to call it a risk asset. They think it’s a safe haven asset.” Seyffart pointed out that BlackRock, the world’s largest asset manager, has started to view bitcoin as more of a safe haven, which could influence how other institutions perceive the asset.
However, recent market trends suggest a different narrative. A report by CryptoQuant indicates that bitcoin has recently diverged from gold, with bitcoin prices falling while gold has reached new record highs. This shift has resulted in a negative correlation between the two assets. “This negative correlation typically signals a risk-averse environment where investors are choosing traditional safe-haven assets like gold over more speculative ones like bitcoin,” CryptoQuant noted.
As the Fed considers its next move, the crypto market is poised for potential changes. While a rate cut could lead to increased interest in cryptocurrencies, particularly as concerns about currency debasement grow, the long-term impact remains uncertain. With differing opinions on whether bitcoin is a safe haven or a risk asset, the market’s reaction to the Fed’s decision will be closely monitored in the days ahead.
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