Bitcoin Gears Up for Strong Surge After Fed Rate Cut

Bitcoin has become increasingly influenced by central bank policies, which play an important role in shaping its price movements. When the Federal Reserve cuts interest rates to manage economic growth and inflation, it directly affects Bitcoin. This article discusses the relationship between Federal Reserve interest rates and their impact on Bitcoin’s price behavior. Prices have shown positive momentum after the Fed’s rate cuts last week and are approaching key level.

Impact of Federal Reserve Rate Cuts on Bitcoin

Bitcoin prices went up after the Federal Reserve cut interest rates by 50 basis points last week to prevent a possible slowdown in the job market. The FedWatch Tool from CME Group shows that more rate cuts could happen by the end of the year. Shares of Coinbase and MicroStrategy also increased after the news. The Fed’s monetary policies have a significant impact on the cryptocurrency market. The chart below explains this relationship.

The chart below shows the relationship between the Federal Reserve’s effective funds rate and Bitcoin prices over the past decade. There is a notable correlation between the Fed’s funds rate and Bitcoin prices. The Federal Reserve’s interest rate is a key instrument for managing inflation, economic growth, and market liquidity, which affect both traditional financial markets and alternative assets like Bitcoin. However, this impact varies based on the broader economic context.

When the Fed increased interest rates during 2017-2018 and from late 2021 onwards, Bitcoin experienced increased volatility and downward pressure. This is because higher interest rates reduce liquidity and make borrowing more expensive, diminishing the appeal of riskier assets like cryptocurrencies. Investors shift toward safer, income-generating assets such as bonds or treasury yields, which benefit from higher rates. Consequently, demand for Bitcoin decreased during these periods, leading to price corrections, as reflected in the chart during rate hikes.

On the other hand, when the Federal Reserve cuts interest rates, especially during economic downturns, Bitcoin prices surge. The chart highlights this pattern during the COVID-19 pandemic in 2020, when the Fed reduced rates to near zero. During this time, Bitcoin saw an unprecedented price surge as investors sought alternative stores of value amidst a weakened US dollar and rising inflationary concerns. Increased liquidity in the financial system and low yields in traditional markets drove demand for Bitcoin, which is viewed as an inflation hedge or a defence against fiat currency devaluation.

Moreover, the chart also shows the Fed’s aggressive rate hikes in late 2021, with the effective funds rate rising sharply. At the same time, Bitcoin prices show a decline from their respective highs. This inverse relationship suggests that Bitcoin thrives in low-interest-rate environments where liquidity is ample, while higher interest rates tend to suppress its price momentum as investors seek more stable returns in traditional markets.

Overall, the explanation indicates that Bitcoin’s price is highly sensitive to macroeconomic policy shifts. Lower rates tend to fuel Bitcoin price rallies, as observed during the pandemic, while higher rates exert downward pressure, as seen during rate hikes. As Bitcoin continues to evolve as a speculative asset class and alternative store of value, its price movements will remain closely tied to central bank policies, especially those influencing liquidity and inflation expectations.

Bitcoin Bullish Momentum Following Fed Rate Cuts

The weekly chart below illustrates the technical outlook for the Bitcoin market, indicating that prices are trending higher within a bullish solid trajectory. Bitcoin has consistently formed bullish patterns following periods of consolidation. The first notable bullish pattern emerged in 2015, generating a solid buy signal when the RSI reached oversold levels. Similarly, strong buy signals were observed in 2018 and 2020 as the RSI again entered oversold territory. The latest buy signal appeared during the consolidation between the last quarter of 2022 and the first quarter of 2023, forming a significant inverted head and shoulders pattern. This pattern triggered a robust rally to the upside. After breaking above the neckline of the inverted head and shoulders pattern, Bitcoin prices surged and reached extremely overbought levels by the first quarter of 2024, as indicated by the RSI.

The price correction from the record highs of the first quarter of 2024 has led to the formation of a descending broadening wedge pattern, representing price compression on the logarithmic chart. This compression suggests that once prices break out of this wedge, a powerful rally is likely to follow, potentially stronger than previous ones. Another important observation is that the RSI is consolidating around the midline after signaling a bullish buy in 2022, which suggests that a new strong buy signal emerged in August 2024. This signal could push prices above $100,000 if the $72,000 level is breached.

To further clarify the above explanation, the descending broadening wedge pattern, which formed in 2024 and is referred to as price compression on the weekly chart, is illustrated on the daily chart below. This descending broadening wedge is a strongly bullish pattern, and if the market breaks above $72,000, it will likely trigger a swift surge to above $100,000. Therefore, the $72,000 level is considered the key threshold for higher prices. The descending broadening wedge is typically known for its bullish implications, and the probability of an upside breakout is high. The quick reversals in Bitcoin prices from $56.5k, $53.5k, and $49.2k indicate underlying strength in the Bitcoin market, suggesting a bullish breakout from the key level is imminent.

Risk Analysis

The Federal Reserve’s interest rate cuts introduce significant risks to the Bitcoin market, primarily due to the macroeconomic environment they create. When the Federal Reserve reduces rates, it increases market liquidity, lowering the cost of borrowing and promoting investments in riskier assets like Bitcoin. However, this influx of liquidity can also heighten Bitcoin’s volatility. Investors may flock to Bitcoin as an inflation hedge, driving prices up, but this speculative surge can lead to sharp corrections if inflation stabilizes or if other assets offer more secure returns. Therefore, Bitcoin’s rapid price swings in response to rate cuts make it a highly speculative investment with increased risk during periods of monetary easing.

Moreover, Bitcoin’s speculative nature also makes it highly vulnerable to sudden shifts in Federal Reserve policy. The unpredictability of future rate cuts or hikes adds a layer of risk to Bitcoin’s long-term viability as an alternative store of value. Investors relying on Bitcoin as a hedge against inflation must also contend with its high susceptibility to external factors like changes in government fiscal policy or global financial instability.

On the other hand, the technical perspective also shows strong volatility in the market on the linear chart. Bitcoin prices formed a highly volatile pattern before shifting in another direction. The double top formation in 2021, which led to a significant price drop, is clearly visible on the chart. Following that, a symmetrical broadening wedge pattern pushed the price back up. Currently, prices are forming a descending broadening pattern, which is considered a bullish development if they break above $72,000. However, until the price breaks above $72,000, there remains considerable risk in the Bitcoin market.

Conclusion

In conclusion, Bitcoin’s price movements are closely linked to the Federal Reserve’s interest rate changes. When rates are cut, increased liquidity and lower borrowing costs boost Bitcoin as investors seek alternative assets amidst concerns over inflation and fiat currency devaluation. However, Bitcoin remains highly volatile and speculative, with sharp price corrections occurring when the economic context shifts. From a technical perspective, the emergence of a descending broadening wedge after the historical bullish pattern formation indicates that the overall bullish outlook remains intact, and a break above the key level of $72,000 could lead to significantly higher Bitcoin prices. Therefore, investors may consider buying on dips, targeting a potential move above $100,000.