What is better for crypto, a 50 basis point rate cut ir a 25 basis point rate cut

Answered at Sep 17, 2024

The Impact of 50 vs 25 Basis Point Fed Rate Cuts on Cryptocurrency Markets

Introduction

The cryptocurrency market is closely watching the Federal Reserve's upcoming decision on interest rate cuts, with significant implications for digital asset prices. This report analyzes whether a 50 basis point (bps) or a 25 bps rate cut would be more beneficial for the crypto market, based on current market conditions and historical trends.

Analysis of Rate Cut Scenarios

50 Basis Point Cut

A 50 bps rate cut could have mixed effects on the cryptocurrency market:

  1. Potential Alarm Signal: According to Markus Thielen of 10x Research, a 50 bps cut might raise concerns about deeper economic issues, potentially leading to risk aversion in financial markets (CoinDesk, 2024).

  2. Short-Term Volatility: A larger cut could trigger significant market volatility, with prices potentially whipsawing before settling (OKX, 2024).

  3. Increased Risk Appetite: The lower cost of borrowing associated with a 50 bps cut could fuel greater risk-taking behavior, potentially benefiting crypto assets (OKX, 2024).

25 Basis Point Cut

A more modest 25 bps rate cut might be viewed more favorably:

  1. Measured Approach: A smaller cut could be interpreted as a cautious move by the Fed, potentially instilling more confidence in the market's stability.

  2. Reduced Economic Concern: A 25 bps cut might suggest that the economy is not in dire straits, potentially leading to a more positive market sentiment.

  3. Gradual Adjustment: This approach could allow for a more controlled market response, potentially reducing extreme volatility.

Historical Context

Previous rate-cutting cycles provide insight into potential crypto market reactions:

  • In 2019, Bitcoin initially rallied 19% within a week of the Fed's rate cut but returned to its previous level two weeks later (CoinDesk, 2024).
  • The cryptocurrency market has shown correlation with equity markets, which have historically experienced drawdowns following the initiation of rate-cutting cycles (CoinDesk, 2024).

Market Expectations and Pricing

As of September 2024, market expectations are split:

  • CME's FedWatch tool showed a 30% probability of a 50 bps cut (CoinDesk, 2024).
  • Polymarket bettors gave a 51% chance of a 50 bps cut and a 48% chance of a 25 bps cut (CoinDesk, 2024).

These expectations suggest that a significant portion of the market impact may already be priced in, regardless of the specific cut size.

Factors Influencing Crypto Market Response

Several factors will influence how the crypto market responds to rate cuts:

  1. Economic Conditions: The broader economic context in which the rate cut occurs will be crucial. A cut amid low inflation and economic growth could be more positive for crypto than one made due to economic fragility (Forbes, 2024).

  2. Market Sentiment: The overall risk appetite and trader sentiment at the time of the cut will play a significant role in determining market direction (OKX, 2024).

  3. Institutional Adoption: The increased presence of institutional investors through spot Bitcoin and Ethereum ETFs may provide a more stable foundation, potentially moderating extreme reactions to rate cuts (OKX, 2024).

  4. Supply and Demand Dynamics: Bitcoin's fixed supply model contrasts with the potential for increased fiat money supply following rate cuts, which could drive long-term value proposition (Forbes, 2024).

Conclusion

Based on the available information, a 25 basis point rate cut appears to be marginally better for the cryptocurrency market in the current context. While a 50 bps cut might provide a stronger short-term boost due to increased risk appetite, it also carries the risk of signaling deeper economic concerns, which could lead to market instability.

A 25 bps cut represents a more measured approach that could instill confidence without raising alarm bells about the economy's health. This scenario is more likely to support steady, sustainable growth in the crypto market.

However, it's crucial to note that the market's reaction will depend on various factors beyond just the size of the rate cut. The overall economic conditions, market sentiment, and the Fed's accompanying commentary will all play significant roles in determining the crypto market's trajectory following the rate decision.

Investors and traders should remain vigilant, manage risk effectively, and be prepared for potential volatility regardless of the specific rate cut implemented. As always in the cryptocurrency space, a diversified approach and careful risk management are essential strategies for navigating market changes.