The relationship between the Fed interest rate cut cycle and the bull and bear market of BTC

BTC has the characteristics of US stocks and is strongly related to US technology stocks. In the early days, the price of BTC was greatly influenced by mining speculation, supply and demand, and hackers. With the increase in total market capitalization, it is more like a technology stock in the US stock market, which is influenced by the macro environment. The impact of BTC block production halving is gradually decreasing, and halving has also become a gimmick for speculation. Understanding the changes in the US stock market, especially the NASDAQ index, during interest rate cuts is crucial for identifying market anomalies.

What influences the Fed's interest rate cut?

The rate cut by the Federal Reserve can usually be divided into two types: preventive rate cut and relief rate cut. The preventive rate cut is a monetary policy taken when there are potential risks but no obvious economic problems, with the main goal of boosting confidence and promoting investment through interest rate cuts to prevent future economic recession risks. The relief rate cut is a monetary policy taken when the economy experiences a significant decline, financial crisis, or other adverse factors leading to a sharp decline in the economy, with the main goal of stimulating economic activity and stabilizing financial markets through interest rate cuts to cope with the already occurred economic recession risks. When the Federal Reserve decides to start cutting rates, it is usually when the U.S. economy has shown signs of weakness or faces recession risks. In summary, the rate cut cycle goes hand in hand with economic recession/crisis.

Performance of US stocks in past interest rate cut cycles

During the interest rate cut cycle from December 2000 to July 2003, the US Federal Intrerest Rate dropped from 6.5% to 1%. This bear market was caused by the bursting of the millennium US internet bubble, during which the Nasdaq fell by 78%.

During the interest rate cut cycle from August 2007 to December 2008, the US Federal Intrerest Rate dropped from 5.25% to 0.25%. In January 2008, the interest rate was cut by an emergency 75 basis points. The bear market was caused by the Liquidity crisis triggered by the subprime loan problem in the United States, and the NASDAQ fell by 56% in this bear market.

During the interest rate cut cycle from August 2019 to March 2020, the Federal Intrerest Rate dropped from 2.5% to 0.25%. On March 3, 2020, the Fed emergency cut 50 basis points in response to the economic risks posed by the epidemic. Unlike previous performance, the Nasdaq experienced a sharp decline under the impact of the epidemic after a slight rise and experienced multiple circuit breakers, with the Nasdaq's maximum decline of 32% Depth.

As can be seen from past history, the Federal Reserve has always accompanied each interest rate cut cycle with a certain degree of economic recession or crisis. The essence of interest rate cuts is that when the US economy faces the risk of recession, a more loose monetary policy is adopted, releasing market liquidity, stimulating economic development, and ensuring a soft landing of the economy. It is similar to applying brakes when a car loses speed while going downhill to prevent the car from losing control and falling off a cliff, resulting in destruction and casualties. Cutting interest rates too early can lead to difficult-to-control high inflation rates, while cutting interest rates too late can lead to difficult-to-control downside risks in the market, resulting in financial crises. Therefore, the Federal Reserve usually takes measures of 'not rushing to cut interest rates' to respond to changes in economic data. Based on historical experience, the US stock market usually reaches a peak before the start of an interest rate cut cycle, and during the downward process, gradual interest rate cuts are implemented to prevent liquidity issues caused by accelerated market decline.

Rate cuts are the result of a market downturn, not the reason for the Bull Market to start.

The market will not see a big Bull Market because of the start of interest rate cuts and liquidity injection. On the contrary, in the long run, it is a behavior taken to prevent the economy from a hard landing caused by rapid economic downturn during the market downturn. Only when the market reaches the bottom of the cycle, the interest rate cut cycle comes to an end, the US Federal Intrerest Rate reaches the lowest point, and the market's liquidity is fully released, can we see the beginning of the Bull Market.

This round of interest rate cuts is most likely to start in September 2024 and continue until the second half or the end of 2025. The market currently predicts a cumulative interest rate cut of 200 basis points, and emergency interest rate cuts caused by unforeseen circumstances cannot be ruled out. For the US stock market, the downside risks have always existed, and it may face a Bear Market. As for BTC, it may also face a longer period of adjustment and the possibility of a Bear Market cannot be ruled out. Due to the highly speculative and bubble-like nature of the crypto world, when the US stock market hit new highs in June, BTC's performance was relatively weak, so the possibility of capital flowing from the declining US stock market to the crypto world seems smaller. Participants in the crypto world should be prepared for the possibility of a Bear Market.