Rate Cuts = Bitcoin Pump? It's Not That Simple

16 sept

Lately, all social media content seems to follow the same narrative: "The Fed is cutting rates, so Bitcoin will pump!"

It's a catchy idea.

After all, lower interest rates are typically good for risky assets like stocks, crypto, and Bitcoin.

But we shouldn't get too excited. Instead, let's take a step back and look at the bigger picture: Undoubtedly, rate cuts can indeed create positive momentum. However, they aren't the holy grail many make them out to be.

The Basic Equation: Lower Rates, Higher Bitcoin?
Of course, the logic behind the rate cut = Bitcoin pump narrative isn't entirely wrong.

When the Fed cuts interest rates, borrowing becomes cheaper, and spending is encouraged. Accordingly, In times of loose monetary policy, traditional investment vehicles like bonds and savings accounts offer lower returns, prompting investors to seek higher-risk, higher-reward assets like stocks and Bitcoin.

Rate cuts can also weaken the U.S. dollar and subsequently boost Bitcoin's price, as they are seen as a hedge against inflation and fiat depreciation.

So yes, on paper, Bitcoin can benefit from the rising wave of risk-on sentiment when the Fed cuts rates.

But—and it's a big but—the world doesn't operate in a vacuum. And this time, things are a bit more complicated.

The Complex Reality: Rate Cuts Aren't the Holy Grail
Here's the problem: While rate cuts can ease Bitcoin price increases, they aren't guaranteed to cause a massive surge. The world is more complex than the simple equation Fed rate cuts = Bitcoin pump.

For one, the U.S. isn't the only player in the game. Central banks worldwide, including the European Central Bank (ECB) and Bank of England (BoE), are also adjusting their monetary policies.
The result? The effects of Fed rate cuts on the U.S. dollar and global markets will be lower because everyone else is playing the same game.

In short, it's not just about what the Fed does—it's about what all central banks are doing.

This synchronization of global monetary policy limits the impact U.S. rate cuts can have on Bitcoin's price. Sure, a Fed rate cut might nudge Bitcoin upward. Still, without a more significant shift in global monetary policy, we won't see the kind of massive rally some hope for.

Bitcoin's Real Catalyst: Quantitative Easing (QE)
The truth is, Quantitative Easing (QE)—not just rate cuts—could really send Bitcoin into the stratosphere.

QE involves the central bank buying government bonds and other financial assets to inject liquidity directly into the economy. This increases the money supply, weakens the dollar, and drives investors into alternative assets like Bitcoin.

During the previous rounds of QE, we saw significant Bitcoin price rallies as liquidity flooded the market.

But right now, QE is definitely not on the table. The inflation risk is still valid, and central banks are treading carefully.

Without QE, rate cuts alone may not provide the kind of liquidity boost that Bitcoin needs to reach astronomic levels.

Don't get me wrong: Rate cuts can create a positive backdrop. Yes, they can give Bitcoin an extra push and send it to a new ATH. But without a QE push (or other monetary instruments), Bitcoin's growth might be more gradual than explosive.

Cautious > Hype
The narrative that "rate cuts = Bitcoin pump" is tempting, but it oversimplifies the reality. Of course, rate cuts can help build positive momentum, making it easier for Bitcoin to rise. But they are not the holy grail; treating them as such can set unrealistic expectations.

It is still being determined if the Fed can manage a soft landing and avoid a recession. Therefore, we should exercise caution instead of excitement.

While rate cuts might support Bitcoin, don't expect an automatic moonshot. Without broader liquidity measures and a booming economy, we're more likely to see slow and steady growth than an all-out rally.

So, before you get swept up in the euphoria of the rate-cut narrative, take a moment to zoom out. The world of macroeconomics is complex, and Bitcoin's price depends on more than just the Fed's next move.

The bottom line:
- Rate cuts can help Bitcoin by creating a more favorable environment for risk assets. Still, they won't guarantee a massive price surge.
- Global central banks are also adjusting their policies, so the effects of U.S. rate cuts may be limited.
- Quantitative Easing (QE) would be the real game-changer for Bitcoin, but a return to QE is unlikely in the near term.