The financial media has been all over the market action since the Federal Reserve cut interest rates last week.
The S&P 500 surged following the news of a 50-basis-point (0.50%) cut – sending stocks to record highs. But that’s not the only asset class that has been on the move…
Bitcoin (BTC-USD) has also been rallying. Now, the world’s largest cryptocurrency is about to break out to its best level since early August.
Bitcoin is up about 9% since last Tuesday – the day before the Fed meeting. The S&P 500 is up about 1% over the same time frame.
The goldbugs tend to be loud and therefore the yellow metal has been grabbing some headlines, even though it is lagging bitcoin with a gain of only 2% since last Tuesday.
Let’s keep our eyes on bitcoin for now, though, and discuss its outlook heading into 2025…
Over the years, bitcoin and the Fed’s policy have formed a direct relationship. As you can see in the chart below, the fed-funds rate has held significant influence over the price of bitcoin over the last decade.
When the Fed began lowering interest rates in 2019 and continued to do so in 2020, bitcoin bottomed below $5,000 before eventually rallying to more than $66,000. Then, the Fed began hiking rates, which caused bitcoin to suffer a major pullback.
Several factors are at work to create this relationship. The most important is that when the Fed increases interest rates, it lowers liquidity in the market and makes “risky” investments – like bitcoin – less attractive.
Meanwhile, higher interest rates make income-producing assets more attractive. Everything from cash to lower-risk dividend paying stocks can attract money away from the “riskier” assets.
But now, the Fed has started its interest rate cutting cycle and plans to continue moving rates lower in the coming year. That means we could see investments shift back into asset classes that carry above-average risk – bitcoin included.
I haven’t changed my prediction that bitcoin will reach $100,000 during this current four-year cycle. In fact, we could see that happen before the end of this year – depending on the election and where the economy goes in the next three months.
But overall, this recent move higher is a positive development for bitcoin and crypto in general. I’ll continue to monitor the asset class’s performance in the coming weeks and months.
Here’s to the future,
Matt McCallEditor, Market Insights
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