The recent trend of Bitcoin can be said to have experienced two extremes:
In mid-June, after the CPI data came out, BTC immediately rose sharply and the price of the currency approached 70,000 US dollars. After Powell stated that he would not cut green candle, the price fell from nearly 70,000 to below 60,000 US dollars!
There are three major benefits for Bitcoin this year:
- Spot ETF
- Bitcoin Halving
- Fed cuts rates
Two of these three have already been achieved.
After the Bitcoin spot ETF was approved in January, the price of Bitcoin soared from 30,000 to over 40,000 US dollars.
In April, when Bitcoin halved, the price of Bitcoin broke through the 60,000 US dollar mark again, and has been consolidating between 60,000 and 70,000 since then.
If the last positive effect of the Fed’s interest rate cut is realized, how high will Bitcoin reach?
In order to answer this question, our Da Piaoliang investment research team has also conducted a careful study and hopes to answer your questions.
01. The impact of the last interest rate cut
According to the news, it seems that the Federal Reserve raises and lowers interest rates at every turn. In fact, the last time the Federal Reserve cut interest rates was in 2020. Because of the epidemic, the then Federal Reserve chairman reduced the interest rate of U.S. debt to 0 in one go.
The last time was in the second half of 2019. The time interval between the two times is only about half a year, which can be regarded as the same cycle.
The previous interest rate cut dates back to the global financial crisis of 2007-2008. Bitcoin had not yet been created at that time. Therefore, we will start our analysis from the interest rate cut in 2019 to see how powerful the Federal Reserve’s interest rate is.
First rate cut of 2019
The interest rate cuts in 2019 started in July and ended in October. We open the Bitcoin chart on Coingeico and see that the trend of Bitcoin in 2019 is like this:
The red framed part is the interest rate cut cycle.
If we put the Fed's benchmark interest rate in, it would look like this:
At the beginning of 2019, the price of Bitcoin was three to four thousand US dollars. Before the interest rate cut, it had doubled to eight thousand US dollars.
As soon as the interest rate cut news was announced, the price of Bitcoin reached a high of US$10,000 in July, and then turned downward.
So judging from this trend, the Fed’s interest rate cut doesn’t seem to be that significant.
Second rate cut in 2020
Then let’s take a look at the second interest rate cut in 2020, which was completed in March.
On March 3, 2020, the interest rate was first cut by 50 basis points. Then on March 15, the Federal Reserve held another FOMC meeting and lowered the target range of the federal funds rate by 1 percentage point to between 0% and 0.25%.
However, we can see that the price of Bitcoin was only over 5,000 US dollars at that time, and there was no big rise in price. Instead, it started to rise all the way at the end of the year, and broke through the 30,000 US dollar mark by the end of the year.
During this cycle of Bitcoin's rise, the Federal Reserve's interest rates have remained stuck on the floor.
02. The relationship between U.S. Treasury yields and Bitcoin
After seeing that the impact of the previous two interest rate cuts on BTC seems to be not significant, some friends say that US Treasury bonds are the direct competitor that diverts funds. Should we take a look at the US Treasury bond yields?
It’s not impossible. Our investment research partners opened the official website of the U.S. Treasury Department and collected some data:
This should be the most authoritative data, right? Let’s manually draw a chart of the five-year Treasury bond yield and BTC price:
From the chart, we can see that during the 2019 interest rate cut, the Treasury bond yield dropped from 3% to below 2%, and the price of Bitcoin rose from over 3,000 US dollars to around 10,000 US dollars.
However, as treasury yields continued to decline, Bitcoin prices did not skyrocket, but instead began to react more than half a year later.
This makes people wonder, does interest really have an impact on the price of Bitcoin? Are there other influencing factors?
03. The relationship between inflation rate and Bitcoin
Our beautiful investment research team is a group of professionals with a background in finance.
When we analyze macroeconomics, we usually cannot just look at interest rates alone, but also have to look at them together with the inflation rate, or CPI.
The same chart is also pulled up for the five-year CPI, which is the inflation data and the trend chart of BTC price:
This chart seems interesting. When Bitcoin skyrocketed at the end of 2020, the US CPI skyrocketed.
Some people asked why we pulled the 5-year period. In fact, the friends in the Da Piaoliang investment research team are also helpless. Because the U.S. Treasury Department’s official website has a lot of data, only the 5-year period is the most complete, and multiple indicators can be compared horizontally.
However, we can see from the trend chart above that only the five-year data is the most complete.
04. The impact of real interest rates
When our investment research partners were analyzing, they found another data that seemed to better reflect the impact of Bitcoin prices and interest rates.
That's the real interest rate.
What is the real interest rate?
If we subtract the inflation rate from the interest rate shown on the face of U.S. Treasury bonds, we get the real interest rate.
Let's take a look at the relationship between the real interest rate of 5-year Treasury bonds and Bitcoin:
Sharp-eyed friends will find this picture interesting:
In the first half of 2019, although the Fed did not cut interest rates, the inflation rate was rising, which led to a decline in the actual yield of US bonds, and Bitcoin began to rise again. In the second half of 2019, although the Fed cut interest rates, the inflation rate was also falling at that time, so the real yield remained in the range of 0-0.5%, and the price of Bitcoin was relatively flat.
In 2021, due to the epidemic, the inflation rate has skyrocketed, but at the same time, the interest rate of US Treasury bonds remains low, so the actual yield of US Treasury bonds is negative 1.0%. This has led to a large amount of funds abandoning US Treasury bonds to look for other anti-inflation alternatives. At this time, the price of Bitcoin naturally ushered in a wave of skyrocketing.
Dear friends, you should know that not only gold and Bitcoin are resistant to inflation, but U.S. Treasury bonds themselves are also investment products designed by the United States to resist inflation.
Let’s take a look at the cycle after 2022. As the United States begins to raise interest rates violently, the actual yield of U.S. Treasury bonds will turn from negative to positive. At this time, U.S. Treasury bonds can outperform inflation again, and Bitcoin will also usher in a wave of sharp declines.
05. Is the scale of US debt unsustainable?
At this point, the scale of U.S. debt is getting bigger and bigger. Judging from this trend, how long can the high yield of U.S. debt be maintained?
In the past five years, the size of US debt has increased from 22 trillion to 34 trillion. Corresponding to the size of US GDP, it has remained at more than 20 trillion in recent years.
Therefore, many people believe that it is impossible for the United States to allow the issuance of U.S. debt to be faster than the GDP rate for a long time without limit. Otherwise, in the long run, the taxes collected nationwide may not be enough to pay the interest.
If it really comes to this, the only option is to lower interest rates.
By then, the trend of actual U.S. bond yields may repeat what happened three years ago:
06. How much can the price increase after the interest rate cut?
Today's content may be more dry
Here is a summary of the factors that affect the rise and fall of BTC:
First of all, we cannot just look at the Federal Reserve’s interest rate, we must look at it together with the CPI, or the inflation rate, so the best indicator is the real yield.
In general, as long as you believe that the inflation rate will not come down, then hold on to your Bitcoin firmly!
Secondly, the scale of US debt cannot be higher than the growth rate of GDP for a long time. The current scale is already extremely large. In the past few days, the US government's debt interest expenditure has exceeded military expenditure for the first time. Therefore, the status of US debt as an anti-inflation investment may be challenged in the future. This is a good opportunity for us Bitcoin, and then our status as electronic gold will be truly recognized.
Finally, November of this year may be a critical time point in this cycle in the United States. On the one hand, it is because the market generally believes that interest rate cuts will begin before November. On the other hand, national debt will also be the core issue in the debate between candidates from both parties.
Once there is a strong commitment to long-term debt limits, Bitcoin will usher in another bull market~
Before the Federal Reserve raised interest rates in 2021, Bitcoin had actually reached the $60,000 mark.
If I were to guess a number off the cuff, if the current inflation rate remains unchanged and the Federal Reserve's interest rate can be reduced to 0, then Bitcoin would definitely double to more than $120,000.
However, it is still unlikely that the interest rate will reach 0. If the interest rate is reduced by half to a few percentage points, the price of Bitcoin is estimated to be around 80,000 to 100,000 US dollars.
