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Recently, Bitcoin’s trajectory has been a tale of two extremes:
In mid-June, following the release of CPI data, BTC soared with a decisive bullish candle, nearly touching $70,000. However, after Powell’s stance on no interest rate cuts, it swiftly dropped below the $60,000 mark.
This year, Bitcoin has seen three major bullish factors:
1. Spot ETF approval for Bitcoin
2. Bitcoin halving
3. Federal Reserve interest rate cuts
Two out of these three have already materialized.
In January, following the approval of Bitcoin spot ETFs, the price surged from $30,000 to over $40,000. In April, during the Bitcoin halving event, prices broke through the $60,000 barrier and have since fluctuated between $60,000 and $70,000.
As for the last bullish factor, the impact of a Federal Reserve interest rate cut remains uncertain. How high could Bitcoin go if this materializes?
To answer this question, our research team at Dapeng Investment has conducted a thorough study.
Impact of Previous Rate Cuts:
Contrary to popular belief that the Fed frequently adjusts interest rates, the last cut was in 2020, when due to the pandemic, the Fed swiftly reduced the interest rate to 0%.
Before that, the previous cut was in the second half of 2019, approximately six months apart, indicating a cyclical pattern.
To analyze the Fed’s influence, we start with the 2019 cut, which began in July and ended in October. Reviewing CoinGecko’s Bitcoin trend chart for 2019, we observe:
The highlighted period indicates the rate cut cycle. Adding the Federal Reserve’s benchmark rates, we see:
At the start of 2019, Bitcoin was priced at just $3,000-$4,000, doubling to $8,000 before the rate cut. Post-announcement, Bitcoin peaked at $10,000 in July but then steadily declined.
Thus, the trend suggests that Fed rate cuts may not significantly impact Bitcoin prices.
Second Rate Cut in 2020:
In March 2020, the second rate cut occurred, first by 50 basis points on March 3rd and subsequently reducing the federal funds rate target range to 0% to 0.25% on March 15th.
However, Bitcoin was only around $5,000 at that time and did not witness a significant surge until the year-end, surpassing $30,000.
Throughout Bitcoin’s rise, the Fed’s interest rates remained stagnant.
Relationship Between U.S. Treasury Yields and Bitcoin:
Reviewing the minimal impact of the first two rate cuts on BTC, some suggest U.S. Treasuries directly diverting funds. Should we consider the yield curve of U.S. Treasury Bonds?
Our research team examined data from the U.S. Department of Treasury’s official website:
Is this the most authoritative data? We manually plotted the trend of the 5-year Treasury yield against BTC prices:
In 2019, with the rate cut, Treasury yields fell from 3% to below 2%, aligning with Bitcoin’s rise from $3,000 to around $10,000. Despite further yield declines, Bitcoin did not skyrocket but responded only after a delay.
This raises questions about whether interest rates truly affect Bitcoin’s prices or if other factors are at play.
Inflation Rate and Bitcoin:
Our distinguished financial research team emphasizes holistic macro analysis, combining not just interest rates but also CPI, or inflation rates.
We also plotted a 5-year CPI inflation data against BTC prices:
Interestingly, Bitcoin’s surge in late 2020 coincided with a spike in U.S. CPI.
Why a 5-year period? Data availability on the U.S. Treasury Department’s website is primarily focused on this timeframe, enabling comprehensive cross-indicator comparisons.
In analyzing these trends, we discovered another influential factor: real interest rates.
What are real interest rates? It subtracts inflation rates from the nominal rates on U.S. Treasury bonds. Let’s observe the relationship between 5-year Treasury real rates and Bitcoin:
Observant readers will notice something intriguing:
In the first half of 2019, despite no rate cut, rising inflation rates led to reduced real yields on U.S. Treasuries, initiating Bitcoin’s ascent. In the latter half of 2019, despite a rate cut, falling inflation rates maintained real yields within the 0% to 0.5% range, keeping Bitcoin prices stable.
By 2021, with inflation soaring due to the pandemic and low U.S. Treasury rates, real yields dipped below zero percent, prompting massive capital inflows away from Treasuries into alternative inflation hedges like Bitcoin.
It’s essential to note that besides gold, Bitcoin also serves as an inflation hedge, challenging the traditional role of U.S. Treasury bonds.
Post-2022 U.S. Treasury Scaling:
Given the increasing scale of U.S. Treasuries over the past five years, from $22 trillion to $34 trillion, relative to the U.S. GDP, there are concerns about sustainability:
Many experts argue the U.S. cannot indefinitely increase Treasury issuances faster than GDP growth. Otherwise, national tax revenues may struggle to cover interest payments.
If true, only interest rate cuts would suffice. At that point, the trajectory of U.S. Treasury real yields may mimic that of three years ago:
Post-rate cut price projections:
Summarizing the factors influencing BTC fluctuations:
Firstly, don’t just focus on Fed rates; consider CPI, especially real yields.
In conclusion, maintain Bitcoin holdings if you anticipate sustained inflation rates. Secondly, with U.S. Treasury scales unlikely to outpace GDP growth long-term, recent sizing has been enormous. Recent government debt interest expenditures surpass military expenses. Consequently, Bitcoin is poised for substantial market growth in 2021, with the Federal Reserve tightens its interest rates.
