Research Summary
The report discusses the potential impact of the Federal Reserve’s expected end to its rate-hiking cycle on the cryptocurrency market. It highlights the historical correlation between the Fed’s monetary policy and Bitcoin’s price movements, and suggests that the end of the tightening cycle could remove a significant headwind to crypto valuations.
Key Takeaways
Fed’s Monetary Policy and Crypto Valuations
- Fed’s Rate Hikes and Crypto: The report notes that the Federal Reserve’s policy of rate hikes has had a significant impact on digital asset valuations, particularly Bitcoin. The cryptocurrency surged in late 2020 as real interest rates turned negative, but declined in 2022 as the Fed’s rate hikes pushed real interest rates back up.
- Bitcoin’s Price Movements: Bitcoin’s price has largely moved in line with expectations, rising during the Fed’s easing process and falling when the central bank began tightening. This is because falling real interest rates tend to result in currency depreciation against other fiat currencies and the price of gold, while rising real interest rates have the opposite effect.
End of Fed’s Tightening Cycle
- End of Tightening Cycle: The report suggests that the Federal Reserve is likely close to the end of its latest tightening cycle. This could be a significant moment for Bitcoin and other digital assets, as the end of the tightening process could remove a major headwind to crypto valuations.
- Impact on Crypto Prices: After the funds rate peaked in the last five tightening cycles, real interest rates declined and equity market performance generally improved. A similar pattern would likely support digital asset valuations. Lower real rates and firmer equity markets should, in turn, support crypto prices.
Uncertainties and Risks
- Uncertainties: The report notes that there is no guarantee that the pattern of falling real interest rates and improving equity market performance following the end of a tightening cycle will repeat itself. The Fed is likely to continue shrinking its securities portfolio, which could put upward pressure on real interest rates.
- Risks: Equity markets could stumble if the economy slips into recession. A “soft landing” could see crypto rebound relatively quickly, but a “hard landing” might prolong the period of range-bound prices.
Actionable Insights
- Monitor the Fed’s Policy: Investors should closely watch the Federal Reserve’s monetary policy, as it has a significant impact on digital asset valuations. The end of the tightening cycle could remove a major headwind to crypto valuations.
- Consider the Macro Environment: The macroeconomic backdrop and swings in Fed monetary policy have heavily influenced crypto valuations in recent years. Investors should consider these factors when making investment decisions.
- Prepare for Potential Risks: Investors should be prepared for potential risks, such as the possibility of the economy slipping into recession or the Fed continuing to shrink its securities portfolio, which could put upward pressure on real interest rates.
