The Federal Reserve instituted a 50-point rate cut, with promising liquidity conditions for a Bitcoin price spike. However, risks abound with cuts this severe, and crypto profits are far from guaranteed.
Global liquidity is very likely to increase, but this might not equal Bitcoin inflows.
Rate Cuts, Liquidity and Bitcoin
The Federal Reserve has decided on a 50-point rate cut, and Bitcoin’s price has been soaring. Given these and broader market trends, many in the community expect a Bitcoin bull market.
However, rate cuts alone cannot guarantee such favorable market conditions; other factors are also crucial. The key to understanding all of this is global liquidity.
At first glance, Bitcoin’s price over the last few weeks has seemed ponderous, sluggish, and indecisive. Upon a closer look, though, it is actually trending closer than ever before. Raoul Pal, CEO and founder of Global Macro Investor, noted that this correlation was “close, very close” throughout 2024.
Compared to previous years’ data on Global Liquidity (L2) and the price of Bitcoin, this year’s proximity is staggering.
Correlation of Global Liquidity (M2) and Bitcoin. Source: Raoul Pal
In an exclusive interview with BeInCrypto, Adrian Fritz, Head of Research at 21Shares, described the relationship between cuts and liquidity.
“The upcoming Fed rate cut could lead to short-term Bitcoin price volatility. However, the extent of the cut will play a crucial role in shaping market reactions. A more aggressive 50 bps cut could offer short-term liquidity relief,” he added, with obvious importance for Bitcoin,” Fritz said.
The “more aggressive” rate cut has taken place, and Bitcoin has already responded in kind. The dollar is the global reserve currency, and US rate cuts have well-established impacts on liquidity and market risks. Crypto provides an invaluable reservoir of liquidity for international markets, and this dynamic has only increased.
Quinten Francois, co-founder of WeRate, has noted a trend pointing towards a liquidity spike, and Bitcoin will surely benefit from it. Seems simple, right?
Read More: Bitcoin Halving History: Everything You Need To Know
Trends Pointing to 2024 Liquidity Spike. Source: Quinten Francois
Dangers in a Volatile Market
Rob Viglione, CEO of Horizen Labs, also discussed these dynamics with BeInCrypto. Like Fritz, he also expected a 25-point rate cut:
“Since a 25 basis point cut is largely expected, major price swings are unlikely, but the direction of travel in the short term will likely be positive as investors move to more volatile assets. In the longer term, lower interest rates will continue to favor risk-on assets like Bitcoin, as investors continue to seek higher returns outside of traditional investments,” Viglione claimed.
However, both underestimated the extent of these cuts. Viglione said that major price swings were unlikely in a 25-point scenario, but cuts are much more severe.
In other words, the market could be set up for a major spike. There are hazards, too, though, that may stand between Bitcoin and a big score.
“A 50-point cut may also heighten concerns about deeper economic challenges or the risk of an impending recession, which could trigger a price pullback. This is especially relevant considering Bitcoin’s recent failure to break through the $60,000 mark and September’s historically poor performance for both Bitcoin and broader markets,” Fritz concluded.
Thankfully, Bitcoin has already broken through $60,000. Bitcoin is viewed, perhaps incorrectly, as a risk-on asset, and lowered interest rates do benefit these. For now, all the conitions seem reasonable to expect a price spike, provided that investor confidence remains high. Nobody can know the future, but we may indeed see $100,000 Bitcoin sooner than we think.
