It’s not just the Federal Reserve hinting at a shift towards looser monetary policy. Several central banks are signaling potential rate cuts in the coming months, a move that could create the perfect storm for Bitcoin’s next big rally.
When central banks cut interest rates, they increase the flow of money into the economy, traditionally boosting the prices of equities and bonds. But with cryptocurrencies now in the mix, the impact could be even more pronounced. Bitcoin, in particular, has shown an interesting relationship with interest rates, often moving inversely to them.
Bitcoin and Interest Rates: The Hidden Connection
A report from Fidelity’s Active Investor Learning Center points out that, while central banks don’t directly control crypto, analysts have noticed that decisions from the U.S. Federal Reserve, in particular, seem to have an indirect effect on the price of cryptocurrencies.
Data from SPGlobal backs this up, showing that since May 2017, Bitcoin and the crypto index have had an inverse correlation to interest rates about 63% of the time. Since 2020, that correlation has strengthened, reaching 75%.
Central Banks on the Verge of Rate Cuts: China, Canada, and South Africa
The U.S. removed the gold standard in 1971, allowing foreign exchange rates to float freely, which has had a lasting effect on global trade and currency markets. Now, with the Fed signaling potential rate cuts, other major economies may follow suit.
China is closely watching U.S. monetary policy, with many analysts expecting an interest rate cut soon due to deflationary pressures on the yuan. Meanwhile, Bank of Canada Governor Tiff Macklem has suggested that more significant rate cuts could be on the horizon. South Africa’s Reserve Bank is also likely to announce a rate cut in the coming weeks.
How Rate Cuts Could Propel Bitcoin Higher
As central banks work to gently guide their economies through another potential downturn, Bitcoin and other cryptocurrencies have shown signs of enthusiasm. Arthur Hayes, the founder of BitMEX and a well-known voice in the crypto space, believes the Fed’s upcoming moves could significantly drive Bitcoin’s price upward.
“They’re going to ramp up the money printer again, and that means a dramatic increase in the money supply,” Hayes said, emphasizing how quickly the effects could hit Bitcoin. “This leads to inflation, which is bad for some businesses but great for Bitcoin—an asset with a fixed supply.”
Having recently closed his short position on Bitcoin, Hayes expects the next phase of monetary easing to send Bitcoin on a rapid journey “to the moon.” Could this be the moment Bitcoin finally pushes toward the elusive $250K mark? The coming months will tell.
