To The Moon

Before 2020, Bitcoin showed a positive correlation with the federal funds rate. However, starting in February of 2020, this correlation began to weaken, turning negative—a trend accelerated by the onset of the COVID-19 pandemic.

This inverse correlation aligns with the observation that rising short-term rates are detrimental to more risk-sensitive assets like Bitcoin. As rates were raised in response to inflationary pressures, Bitcoin prices were consequently impacted.

How Bitcoin Move In Past Monetary Action

If we looked at how the evolution of federal funds rates (purple line) and Bitcoin prices (candle) have showed us. There is a notable rise in key interest rates in 2022 coincides with a significant drop in Bitcoin prices, highlighting the impact of monetary tightening on more volatile investments.

As seen on the BTC chart above, the only time that the FED has increased the rates it did not have a bearish effect on BTC. However, this was done during a period of lower inflation than we currently have.

To combat the current inflation rates, the FED needs to increase the rate at a much faster and higher rate than what we have seen in the past 30 years.

The imposed rate hikes of 0.25% every meeting are not enough to reduce the 10% year-over-year inflation.In case the FED decides to raise the rates with big steps (>1% per meeting), this can definitely have a huge impact on the stock- and crypto-markets. It will become much more expensive for banks to borrow (and invest) money since money will become more scarce.

Correlation Between Bitcoin and Treasury Note Yield

If we looked at the correlation between Bitcoin prices and long-term interest rates, it was positive initially but also quickly turns negative in mid-2020. This suggests an inverse relationship where higher long-term rates could lead to a decline in Bitcoin prices.

However, in 2023, the correlation begins to recover, potentially indicating a change in market dynamics or in investor responses to macroeconomic factors influencing both Bitcoin and long-term interest rates.

I think we need to understand the reasons behind these rate hikes which is crucial for understanding their impact.

Between 2016 and 2019, the Federal Reserve raised its key interest rates to normalize its monetary policy after a period of low rates, which had been maintained to stimulate the economy during and after the 2008-2009 financial crisis. Then, in 2022, rates were adjusted again, this time in response to inflation concerns.

So when economic improvement is anticipated, long-term rates and risky assets like Bitcoin can rise together, driven by positive investor sentiment and inflationary expectations.

However, when rates rise mainly due to monetary tightening aimed at combating inflation, the cost of capital increases. Consequently, non-income-generating assets such as Bitcoin lose their appeal, resulting in a drop in their value as rates continue to rise.

But if rate cut were to happen on next week Fed meeting, we could see Bitcoin appeal increasing, there have been signs of Bitcoin correlation to S&P 500 performance, when market start to perform with a small rally, Bitcoin interest does increase and hence the price.

Summary

If we looked at how Bitcoin have behaved in past monetary action of rate increasing, it is losing its appeal, but since 2023, we are seeing a different behavior, Bitcoin have performed while stock market also performed.

So with rate cut anticipated and also factor into the market prices, we could see Bitcoin appeal increasing and this could help Bitcoin trying for the highs again.

$MicroStrategy(MSTR)$ $iShares Bitcoin Trust(IBIT)$ $Coinbase Global, Inc.(COIN)$

Appreciate if you could share your thoughts in the comment section whether you think Bitcoin appeal would be coming back once we saw the first rate cut?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.