Why US Fed rate cut is set to increase appetite for cryptos

Lower borrowing costs and increased liquidity offer a promising landscape for digital assets, experts say

Bitcoin has been trading within a relatively narrow range since setting a record high of almost $74,000 in March. Reuters

The US Federal Reserve’s rate cuts are positive for risk-taking by investors and will boost sentiment towards Bitcoin and other cryptocurrencies, according to experts.

Lower interest rates usually help to spur an increase in demand for riskier assets, they say.

After the Fed cut US interest rates by 50 basis points on Wednesday, Bitcoin, the largest cryptocurrency, surged by more than 6 per cent, reaching an intraday high of $63,800 on Thursday. Bitcoin was trading at $63,066.81 at 10.35am UAE time on Saturday.

“Though the effects of the Fed rate cuts are uncertain, the sizeable impact on the global economy and in turn, the prices of digital assets, may lead to an increase in activity as lower borrowing costs and increased liquidity offer a promising landscape for digital assets,” says Richard Teng, chief executive of global crypto exchange Binance.

“Lower interest rates increase liquidity in the financial system, driving up demand for higher-yielding, riskier assets, including crypto. Additionally, lower rates can also stoke global inflation fears, prompting a potential increase in investors considering digital assets as an alternative store of value.

“Several indicators suggest that policy changes in September could also be well-timed for crypto investors.”

The US central bank's move was the first time it had lowered its benchmark lending rate since the Covid pandemic paralysed the economy more than four years ago. But its chairman Jerome Powell was careful to avoid committing to a similar pace going forward, saying moves would be guided by economic data.

Bitcoin has been trading within a relatively narrow range since setting a record high of almost $74,000 in March.

Hedge fund manager Anthony Scaramucci said in an interview earlier on Wednesday that he expected Bitcoin to reach new record highs fuelled by a combination of the interest rate cut and more regulatory clarity on the crypto industry from the US.

While the rate cuts typically have a positive impact on Bitcoin in the immediate future, midterm price movements will depend on the global macro environment, according to Stefan Kimmel, chief executive of crypto exchange M2.

“If a recession can be avoided, we would expect strong virtual assets. As long as there is uncertainty about gross domestic product growth and employment, volatility and drawdowns are to be expected,” he says. “The US elections in November are expected to provide another boost to markets due to reduced uncertainty.”

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, agrees, saying that the positive outlook for digital assets could be further boosted if Donald Trump returns to the White House in November.

Gabriel Debach, market analyst at trading platform eToro, says crypto traders have already locked up millions of dollars in Bitcoin options tied to the upcoming US elections.

“The election expiration options, with settlement expected four days after the elections, are gaining traction, with notional open interest of around $703 million, according to Deribit data,” Mr Debach says.

“In this context, Trump is emerging as a potential catalyst for the crypto market. The fact that he became the first former president to use Bitcoin for a recent transaction in New York is significant, and many see him as a driving force for the sector. His promise to turn America into the crypto capital has given new momentum to the Trump trade.”

With a rise of more than 45 per cent since the start of the year, supported by the approval by the Securities and Exchange Commission of the first spot exchange-traded fund in early January as well as its halving in mid-April, Bitcoin has since shown clear signs of fatigue, Mr Debach says.

Not surprisingly, from its all-time highs in mid-March, the leading crypto asset has seen a correction deepen until September 6, with a drawdown that had reached about 28 per cent, now reduced to 13 per cent, he says.

Fed's interest rate cut: How Gulf economies are reacting

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“The gold rally then led many to criticise Bitcoin, calling into question its title as ‘digital gold’. However, despite its scarcity (with a limited supply), it is important to remember that Bitcoin does not play the same role in investment portfolios as gold,” he says.

“Institutional investors do not allocate capital to Bitcoin for the same reasons they do with gold. If there is panic in the markets or the need to reduce leverage, crypto is often the first to be liquidated.”

Bitcoin’s dominance, which had been near year-to-date highs, is now declining. This suggests a renewed appetite for risk not only in Bitcoin but also in other crypto assets, Mr Debach adds.

On the contrary, Rifad Mahasneh, general manager for Middle East and North Africa at crypto exchange OKX, cites increased crypto adoption by institutional investors and even corporations allocating Bitcoin to their treasury funds.

“Our recent research shows that 70 per cent of institutional investors express interest in allocating towards Bitcoin within the next two to three years. Bitcoin's potential to protect against inflation and geopolitical risks can be appealing to investors,” he says.

“For sophisticated investors looking at long-term value and portfolio diversification, cryptocurrencies present a compelling option that's hard to ignore if you've taken the time to understand the technology and its potential. The market may need additional catalysts and ongoing education for people to fully understand the long-term potential of cryptocurrencies.”

Bitcoin's potential to protect against inflation and geopolitical risks can be appealing to investors

Rifad Mahasneh,
general manager for Middle East and North Africa, OKX

However, Antonio Di Giacomo, senior market analyst at XS.com, says the regulatory environment is limiting Bitcoin's long-term outlook.

“In recent months, authorities have intensified their scrutiny of cryptocurrencies, which could lead to new restrictions that negatively impact its price. Proposed regulations aim to control the use of cryptocurrencies in illicit activities and ensure greater transparency, but they could also discourage some institutional and retail investors,” he warns.

“Finally, there has been a noticeable decline in retail investor interest, which used to be a significant driver of the cryptocurrency market. Global economic turbulence and increased competition from more stable cryptocurrencies have created a more complex scenario for Bitcoin. Without strong retail demand, the cryptocurrency may struggle to maintain its current momentum despite the low-interest-rate environment.”