Is it really that simple? 'Rate cuts = increases'? The Fed's interest rate decisions affect the crypto market through several channels.
The first is the US dollar. A rate cut means a decrease in the yield of dollar-denominated assets, and funds will seek other destinations. When the dollar weakens, dollar-denominated assets (including BTC) tend to perform better.
The second is liquidity. In a low interest rate environment, the cost of borrowing is low, and there is more money in the market, some of which will flow into risk assets. The bull market from 2020 to 2021 was largely a result of the Fed's unlimited quantitative easing.
The third is risk appetite. When the Fed releases dovish signals, investors are more willing to take on risks, and funds flow from bonds and money market funds into stocks and cryptocurrencies; conversely, hawkish signals cause funds to flow back into safe assets.
These three channels together form the transmission chain of 'Fed policy → USD/liquidity → risk preference → crypto assets'.
Theoretically, BTC currently has two popular identities: 'digital gold' or 'risk asset'.
If it is digital gold, it should rise in times of market panic and be negatively correlated with the stock market. If it is a risk asset, it should rise and fall with Nasdaq and perform well during periods of liquidity easing.
The reality is that BTC has behaved more like the latter over the past few years.
According to CME's research, starting from 2020, the correlation between BTC and Nasdaq 100 jumped from near zero to around 0.4, sometimes even exceeding 0.7. So if it is digital gold, it should rise in times of market panic and be negatively correlated with the stock market. If it is a risk asset, it should rise and fall with Nasdaq and perform well during periods of liquidity easing.
The reality is that BTC has behaved more like the latter over the past few years. Recently, an interesting phenomenon has emerged. Despite Nasdaq being only 2% away from its historical high, BTC has fallen 27% from its October peak.
Market maker Wintermute has an explanation for this:
BTC currently shows 'negative skew, it falls more when the stock market drops, and it reacts sluggishly when the stock market rises. In their words, BTC 'only exhibits high Beta in the wrong direction.'
What does this mean?
If this week's FOMC signals a dovish stance and US stocks rise, BTC may not necessarily rebound in sync; however, if it signals a hawkish stance and US stocks fall, BTC could drop even harder. This is an asymmetric risk structure.
