Original title: How The Fed Rate Cut Could Make Bitcoin More Volatile
Original author: Dave Birnbaum, Forbes

Original translation: zhouzhou, BlockBeats

The Bitcoin market is preparing for a volatile month as expectations of an upcoming rate cut by the U.S. Federal Reserve have attracted widespread attention.

After the Bitcoin price fell sharply from $65,000 in late August to around $59,000 in early September, the market is expected to usher in more turbulence. The outcome of the Fed's next meeting, which is expected to trigger a rate cut, is likely to determine the short-term direction of the Bitcoin-to-dollar exchange rate, but what makes the market more nervous is the potential for deeper economic instability.

Most market participants expect a 25 basis point rate cut, but there are also rumors that the Fed may take a more aggressive 50 basis point rate cut, a move that is likely to trigger greater market volatility. As the global economy struggles under the weight of central bank mismanagement and market distortions, investors who use Bitcoin as a hedge against currency debasement may face a test of confidence.

Impact of Fed Rate Cuts on Bitcoin

Expectations of an impending rate cut by the Federal Reserve have heightened market uncertainty. Historically, rate cuts have been seen as bullish for Bitcoin, as monetary easing tends to weaken the dollar and boost demand for assets. But this rate cut could be a double-edged sword.

After embarking on an aggressive rate hike cycle in 2022 to curb inflation, the Fed is now being forced to pivot as economic conditions deteriorate. This is to be expected in a financial system that relies on continuous liquidity injections.

For Bitcoin, although it has historically benefited from monetary easing, the Fed's decision could have unexpected consequences. As an alternative to fiat currencies, Bitcoin excels especially when currencies are devalued. However, the potentially aggressive 50 basis point rate cut introduces a factor that market participants may not have fully considered: concerns about an impending economic slowdown or even recession. If the Fed signals deeper economic concerns, market participants may shy away from assets they perceive as riskier, including Bitcoin, even though its value as a decentralized currency network has not changed.

Does a 50 basis point rate cut signal deeper problems?

Concerns about a 50 basis point rate cut stem from the broader macroeconomic backdrop, with the Fed's emergency rate hikes in 2022 aimed at curbing inflation but also exposing underlying weaknesses in the economy - weaknesses that are now surfacing in the form of a slowing labor market.

Friday’s jobs report was another chapter in a multi-year underperformance of the U.S. labor market. Until now, that trend has been obscured by exaggerated jobs reports that have been repeatedly revised down after their initial release. The most recent report actually showed signs of labor market weakness when it was released, with the Bureau of Labor Statistics’ household survey showing that the unemployment rate had not improved in the past month and that the number of unemployed people had increased from 6.3 million to 7.1 million over the past year. That means the labor market has actually been so weak that the weakness can no longer be hidden.

Many employed people are still struggling financially. Depending on the measure, the purchasing power of U.S. wages is either in line with inflation or lagging behind it.

Federal Reserve Chairman Jerome Powell (Photo by Alex Wong)

Global Economic Conditions and Bitcoin’s Long-Term Prospects

Central banks around the world are also grappling with the challenges of weak economies, with both the ECB and the Bank of Japan facing difficult issues that could affect the flow of global liquidity. Eurozone GDP grew just 0.2% last quarter, while the Bank of Japan is considering raising interest rates, which would accelerate the unwinding of the yen carry trade. Meanwhile, China is preparing to inject liquidity into its slowing economy in an attempt to stave off a recession as factory output, consumption and investment slow and unemployment rises to a six-month high.

In addition to this, the intense presidential election season in the United States brings uncertainty about the outlook for economic policies that could have a negative impact on investment and economic growth. If candidates supporting these policies gain political momentum, expect the Bitcoin exchange rate to become more volatile against the U.S. dollar.

Bitcoin’s correlation with global economic conditions has a “multiple personalities” that make its price movements difficult to predict. In some cases, such as the early days of the war in Ukraine, Bitcoin has behaved as a risk-off asset, while in other cases, such as the early days of the COVID-19 outbreak, it has behaved as a risk-on asset.

What is clear, however, is that central banks’ attempts to paper over deep cracks in the rules-based order by injecting liquidity will only serve to highlight Bitcoin’s long-term advantages. Over time, Bitcoin’s monetary properties will ultimately prevail.

September, memorable moments for Bitcoin?

As September progresses, Bitcoin investors are bracing for possible volatility. The Federal Reserve's upcoming rate cut decision makes Bitcoin's outlook uncertain. While the market may have digested the impact of a 25 basis point rate cut, limiting its short-term impact, if the rate cut reaches 50 basis points, it may indicate deeper economic problems and trigger a wave of volatility.

However, there is still room for surprises in the market. If the Fed can find the right balance between responding to economic risks and maintaining market confidence, Bitcoin may move towards a stronger position after this turbulent period. However, if recession concerns continue to heat up, Bitcoin's price may fall further and investors will have to deal with an increasingly unpredictable market.

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