(Kitco News) – With the fourth Bitcoin (BTC) halving now officially in the record books and the top crypto undergoing its typical post-halving pullback that usually leads to an uptick in anxiety from crypto investors, the market is now looking for the next catalyst to get things moving in a positive direction.
At the start of 2024, the prevailing consensus was that the Federal Reserve would implement six or seven interest rate cuts over the course of the year as economic measures were improving and stocks were trending near all-time highs.
But the re-emergence of rising inflation has put rate cuts on hold, and months of higher-than-expected economic readings have market participants clinging to hope for at least two cuts before year-end, with most trying to ignore the possibility of an interest rate hike, which would likely devastate risk assets.
Wednesday saw the Federal Reserve hold interest rates steady in the range of 5.25% to 5.5%, with Fed Chair Powell noting that progress towards their 2% inflation target has stalled, reducing the likelihood of an interest rate cut in the near future.
“In recent months, there has been a lack of further progress towards the committee’s 2% inflation objective,” Fed officials said in a policy statement. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
While "risks to achieving its employment and inflation goals have moved toward better balance over the past year,” Fed officials characterized the economic outlook as “uncertain.”
To get insight into how the evolving developments around interest rates will affect the price of Bitcoin moving forward, Kitco Crypto spoke with several experts in the field to get their take on what to expect as the Fed navigates the minefield of interest rates, inflation, and rising debt as they attempt to avoid a deep recession.
"As Bitcoin becomes more integrated into the general investment community, interest rate changes will have a greater impact on its price,” said James Davies, co-founder and CPO at Crypto Valley Exchange. “Bitcoin ETFs represent a significant share of the liquid Bitcoin, but the US, whilst sizable, is far from dominant in the global Bitcoin holdings picture.”
“Falling interest rates are likely to push investors to higher-yielding, riskier assets, with Bitcoin the entry point into the cryptocurrency investment world,” Davies said.
"We are not expecting a rate rise in the US or other major economies; whilst Inflation has not been tamed, it doesn't justify short-term rate rises currently. The Fed will mostly likely hold rates,” he said. “As a consequence, we are not expecting major changes to Bitcoin based on Fed announcements without significant surprise that would affect all assets.”
Davies said that a rate hike would put pressure on risk assets.
"On the flip side, higher rates would create competition for yield and likely reduce capital inflow in the U.S. to Bitcoin, suppressing the rate of growth of demand, but not substantially at these rate levels,” he said. “The IMF points on the sustainability of the debt levels are a lot more nuanced than the politicized rhetoric around it in the US; the worry is that inflation is not behind us enough and that rate reductions planned won't be possible, causing significant public funds to be allocated to repayment.”
"The U.S. economy though is vast and central to the world, and there is not likely to be a substantial run to other assets no matter who runs the U.S. economy,” he concluded. “Bitcoin price drivers will be its accessibility, portability, transparency, and responsiveness to global markets. Its long-term price is not going to be driven by short-term U.S. rate changes, and the U.S. economy's long-term debt is not going to be driven by short-term rate changes or political decisions but by macroeconomic factors and geopolitics.”
“Interest rates have a clear impact on Bitcoin, particularly now that we're past the halving event,” said Matt Bailey, founder and CEO of Gameon. “Lower interest rates have traditionally made bonds and other fixed-income investments less attractive, drawing investors towards alternatives like Bitcoin, which is often seen as 'digital gold' or a hedge against inflation.”
“If interest rates continue to fall, we could see even greater interest in Bitcoin as traditional assets yield less,” he added. “Conversely, if interest rates rise, there might be a temporary pullback in Bitcoin’s price as traditional investments become more lucrative.”
Bailey said factors unrelated to interest rates are likely to have more of an impact on Bitcoin’s price moving forward. “It's Bitcoin’s broader adoption and technological progress that are likely to define its long-term trajectory, far more than short-term shifts in economic policy. It’s essential to understand Bitcoin's dual role as both a tech innovation and a financial asset to fully grasp its future movements.”
Christopher Alexander, Chief Analytics Officer of Pioneer Development Group, said that when the Fed does decide to cut interest rates, it “will have a greater impact than usual.”
“Keep in mind that BTC always gets a lift from a cut and the next cut that happens will be the first since the BTC ETFs were approved,” he noted. “I think it can really restart the ETFs, which are way down on inflows at the moment.”
Alexander said that with Wall Street and its affiliates now owning 4% of the circulating supply of Bitcoin, “events that traditionally move the stock and other traditional markets will have a great impact. You already have a small indicator: weekend transactions for BTC tend to be much slower since the BTC ETF trading desks are closed.”
He noted the competing factors of higher rates and rising debts, saying, “Higher rates are definitely bad for BTC price, but rising debt is a bit different. Rising debt typically means inflation, and BTC can be a safe harbor for your cash during a period of high inflation.”
When asked if there is a point when investors look to get access to any hard asset, like Bitcoin or gold, instead of exposure to the USD, Alexander said he thinks it is already happening, “though it tends to be limited to people who have long term concerns about the viability of the dollar against decades of endless government spending and inept political leadership.”
“If inflation continues like it has the past few years, I think people may view turning their dollars to BTC as an inflationary hedge,” he said. “You already see this done in South America in countries where the fiat currency is unstable.”
As for how the U.S. can course correct for what many, including the IMF, have called unsustainable debt printing, Alexander warned that it's rapidly becoming unmanageable.
“Interest payments on the national debt now exceed the defense budget. Defense spending protects the country from existential threats. If we spend more on debt interest than the military and still fail to view debt as a threat, I am not sure what can cause a course correct outside of economic collapse,” he said. “For decades, the country has been mismanaged by incompetent elites from both sides of the political spectrum, and effective leadership does not seem likely to come from the current generation of students at elite universities either.”
Mohsin Waqar, CEO of Senet, also thinks “Interest rates wield considerable influence over Bitcoin's trajectory post-halving.”
“If rates are cut, Bitcoin could become more attractive as a hedge against inflation and a store of value, potentially driving increased investment,” he said. “If rates are cut, investors seeking higher returns may allocate more capital to alternative sets like Bitcoin, driving up its price and potentially improving its market sentiment among institutional investors.”
“Conversely, rate hikes might temporarily dampen Bitcoin's price as traditional assets gain appeal,” Waqar warned. “However, Bitcoin's long-term trajectory is more closely tied to its adoption and technological advancements than short-term economic policies.
Short-term weakness following FOMC decision
Addressing the highly watched Federal Open Market Committee (FOMC) meeting, and subsequent announcement on interest rates, Lucas Kiely, chief investment officer of Yield App, told Kitco Crypto “We may see some weakness in Bitcoin’s price directly after the next Federal Open Market Committee (FOMC) meeting in May if, as many are now expecting, rates remain unchanged.”
“But this will be nothing more than a short-term blip in Bitcoin’s current cycle,” he added. “The real driver of performance is the Bitcoin ETF and the recent halving, with the latter historically followed by a rally.”
“During recent inflation and interest rate announcements, we’ve seen little reaction from Bitcoin,” Kiely noted. “In fact, BTC has continuously performed strongly despite worries that interest rate cuts may be further away than hoped. So there’s no reason why it would react differently this time around.”
He said that while interest rates are a key factor, they are being overshadowed by rising levels of debt, which could provide a boost to risk assets like Bitcoin.
“Unsustainable levels of U.S. debt are likely a contributing factor to the renewed weakness in the U.S. dollar. As the U.S. continues to hurtle towards a debt cliff, we're likely going to see more of this depreciation, which will ultimately be good for risk assets like Bitcoin,” he said. “Sky-high debt could also force the Federal Reserve to cut interest rates sooner than the economic backdrop would warrant, which would also support risk assets.”
Kiely added that we’ve already started to see a depreciation in the value of the U.S. dollar against other global currencies, which could also benefit Bitcoin as global investors look for good USD alternatives.
“In recent days, the U.S. dollar index has already pulled back to around 105, and some pundits predict it could fall as low as 92 later this year,” he said. “In this environment, Bitcoin is an obvious hedge and, with easier access via spot ETFs, we will see more money flowing into Bitcoin as a result.”
Like Alexander, Kiely sees the U.S. debt situation quickly spiraling out of control, with no good options to fix the underlying issues.
“The US finds itself in a very precarious situation managing the mounting debt pile,” he said. “There are, of course, policies it can implement, including higher taxes or cutting interest rates to reduce its repayments. But with sticky inflation and a persistently strong jobs market, cutting rates could send prices into overdrive again. The government is quickly running out of options, though. It can only kick the can down the road for so long when it comes to debt. Eventually, it will have to face the music.”
Interest rates are not the main driver of Bitcoin price
Adam Sze, Head of Product Development at Global X, said that while “increased concerns about sticky inflation have potentially delayed the Fed’s decision to cut interest rates until later this year,” he doesn’t think the Fed’s decision to raise or lower rates will be a main driver for Bitcoin’s price action.
“While interest rates are a contributing factor to the price movements of Bitcoin (and other risk assets), they are not necessarily the main driver,” he said. “There are several other factors that influence the relationship between Bitcoin and interest rates, including macroeconomic conditions, regulatory developments, investor sentiment, and geopolitical risk.”
He noted that while lower interest rates could potentially be bullish for Bitcoin, “it’s also important to assess how these factors interact with each other when it comes to understanding price movements.”
In the event that the Fed starts to lower interest rates, Sze said Bitcoin could see increased demand “because lower interest rates typically reduce the return on traditional savings accounts and investment vehicles like bonds. This could lead investors to seek higher returns in more growth-oriented markets, like Bitcoin.”
Lower rates could also increase Bitcoin’s stature as a hedge against inflation, he added. “When interest rates decrease, it can signal central banks’ efforts to stimulate economic activity, which may lead to higher inflation expectations. Due to its fixed supply of 21 million Bitcoins, Bitcoin can be seen as a hedge against inflation and a store of value.”
“Investors may favor hard assets – like Bitcoin or gold – over the U.S. dollar for several reasons,” Sze said. “It often depends on economic conditions and market trends. Some scenarios where investors may favor hard assets include: When there are concerns of a weaker US dollar; when there are inflationary pressures; and during periods of geopolitical uncertainty.”
“If investors anticipate a weakening of the U.S. dollar due to looser monetary policy, then both gold and Bitcoin might be favored due to their ability to hedge against the depreciation of fiat currencies,” he said. “Investors concerned about the erosion of the long-term purchasing power of the U.S. dollar may choose to allocate to hard assets because hard assets’ limited supply and scarcity make them a potential inflation hedge. And during periods of geopolitical uncertainty, gold and Bitcoin operate independently of central bank policies and government control.”