Anticipation of December Rate Cut
The CME FedWatch Tool currently signals an 89.6% probability of a 25 basis point interest rate cut by the Federal Reserve in December. An additional 10.4% chance suggests no change to the current rates. This expectation significantly influences cryptocurrency markets, as a reduction in interest rates is generally anticipated to increase liquidity, potentially benefiting assets like Bitcoin and Ethereum and impacting their future valuations.
Impact of Rate Cuts on Digital Assets
The CME Group's FedWatch Tool highlights a strong likelihood of a December interest rate reduction by the US Federal Reserve. This potential monetary policy easing is expected to positively affect risk-on assets, particularly within the cryptocurrency sector. The tool derives its rate outcome probabilities from futures prices, reflecting current market sentiment regarding monetary policy direction.
A decision by the Federal Reserve to lower interest rates could create a more favorable financial environment for digital assets, including Bitcoin (BTC) and Ethereum (ETH). Typically, a decrease in the risk-free rate can lead to improved valuation prospects for these cryptocurrencies, especially within scenarios of increased liquidity.
Arthur Hayes, co-founder of BitMEX, has noted on X that Federal Reserve rate cuts historically tend to be bullish for Bitcoin due to the depreciating purchasing power of fiat currencies.
Federal Reserve rate cuts are generally bullish for BTC as fiat loses purchasing power. #BTC#Crypto
— Arthur Hayes (@CryptoHayes) December 1, 2023
Similarly, Raoul Pal of Real Vision has described the potential positive impact on global liquidity as a significant boost for risk assets.
Historical Precedent for Rate Cuts and Crypto Markets
The Federal Reserve's rate cuts in 2020 played a substantial role in supporting Bitcoin's price ascent. During that period, ample liquidity flooded global markets, underscoring the direct influence of Federal Reserve decisions on the performance of crypto assets.
As of the latest data, Bitcoin holds a market dominance of 58.40%. The cryptocurrency is trading at $93,857.10, with a 24-hour trading volume of $64.16 billion. This represents a daily price increase of 4.20%. The total market capitalization of Bitcoin stands at $1.87 trillion, despite a 9.48% decline over the past 30 days.
The research team at Coincu suggests that a confirmed decision by the Federal Reserve to cut rates could further drive appreciation in the values of both BTC and ETH. Historical patterns indicate that periods of increased financial market liquidity often lead to new cyclical highs for these assets.
"Policy decisions will remain contingent on the data we receive about inflation and economic growth." - John C. Williams, Vice Chair of FOMC, President of the New York Fed.