Taking stock of history, the relationship between the Fed's interest rate increase and cut and the rise and fall of bitcoin 18.Jan.2022

Taking stock of history, the relationship between the Fed's interest rate increase and cut and the rise and fall of bitcoin

When the Fed's interest rate hike in 2022 is almost a foregone conclusion, many people worry that it will directly end the bull market. Realistically, this worry is very reasonable, because the Fed's interest rate hike is more bad for the whole encryption market.

However, raising interest rates is a complicated economic issue, which can be said to be one of the core issues of modern economic theory. If you want to clarify this matter, you may need to open a separate column, and you will talk slowly when you have the opportunity to follow. Here we only say one thing: will the encryption market fall if interest rates are raised? On the contrary, will the interest rate cut rise?

Let's start with the answer: not necessarily. The actual rise and fall may be just the opposite of the policy of interest rate reduction and interest rate increase. More importantly, what are the reasons for raising and reducing interest rates? What was the economic environment and the development stage of the encryption market itself at that time?

So from a historical point of view, how will the rise and fall of bitcoin be caused by the Fed's interest rate hike and interest rate cut?

On January 3, 2009, the first bitcoin was officially dug out. In the following seven years, that is, until December 2015, due to the crisis of economic recession caused by the subprime mortgage crisis, the Federal Reserve interest rate has been maintained at 0.25%. Bitcoin has completed the development from 0 to 1. During this period, because bitcoin is still in the early development stage and there is no mainstream capital intervention, the rise and fall of bitcoin at this stage are mainly affected by its own halving cycle, and the monetary policy of the Federal Reserve has relatively little impact.

Since December 2015, due to the continuous low interest rate of the Federal Reserve, inflation has gradually become serious and the economy has been relatively overheated. Therefore, the Federal Reserve has raised interest rates nine times in three years until December 2018, increasing the interest rate from 0.25% to 2.5%. During this period, bitcoin just experienced the second halving, opening the second round of halving. During the first five interest rate hikes (December 2015 December 2017), bitcoin continued to rise as a whole, rising 100 times against the interest rate hike. The subsequent four interest rate hikes were relatively more violent. Bitcoin also fell all the way after reaching the second round of halving high at the end of 2017, with a maximum drop of 85%.

At this stage, although the rise and fall of bitcoin is still more affected by its halving, the Fed's monetary policy has had a great impact on the rise and fall of bitcoin. Basically, every time the Fed announces an interest rate increase, bitcoin will fall in a short time. The four intensive interest rate hikes in 2018 directly ended the bull market.

From August 2019, the Federal Reserve began to cut interest rates to promote economic development. By March 2020, due to the spread of global panic caused by the epidemic, all markets in the world had collapsed, and the encryption market had also experienced a memorable "3.12" sharp decline. The Federal Reserve cut interest rates by 1% at one time. During this period, the Federal Reserve cut interest rates five times, reducing the interest rate from 2.5% to 0.25%, while bitcoin gradually rebounded after the Federal Reserve announced the suspension of interest rate hike in March 2019, and there was a small bull market. However, the emergence of COVID-19's black swan has led to a "3.12" crash in bitcoin and the entire encryption market.

At this stage, bitcoin began to be gradually recognized and participated by the mainstream world, making it gradually cool and hot with the mainstream market. The intervention of institutions represented by Wall Street and "old money" made bitcoin gradually "American stock" and gradually form a common vibration with the mainstream market.

Since March 2020, the Federal Reserve's interest rate has remained at 0% - 0.25%, and bitcoin has halved for the third time. As we can see, bitcoin has stepped out of a powerful bull market and reached the current historical maximum of $69040 in November 2021. Then, the Federal Reserve gradually began to reduce bond purchases and let the wind start to raise interest rates, People's expectation of raising interest rates became stronger and stronger, and bitcoin started the falling mode.

In conclusion, with the "mainstreaming" and "US stock" of bitcoin, the change of the Federal Reserve's monetary policy has a greater and greater impact on the rise and fall of bitcoin, and even determines the bull and bear form of bitcoin to a great extent. At this stage, the Fed's monetary policy is a bit like that in 2015, on the eve of the end of QE to start raising interest rates, and since 2015, bitcoin has experienced the process of rising bull and bull bear conversion in two and a half years.

Compared with U.S. stocks, will interest rate hikes and interest rate cuts fall / rise?

If we compare history, will bitcoin be like the bull market before the bear market after the Fed raised interest rates in 2015? To answer this question, we need to analyze the current situation of bitcoin itself. Compared with the past, the fundamentals of bitcoin have been greatly different. In our original article: "bitcoin" American stock ", will the boundary between bull and bear gradually blur?" (you can check it in the [news] column of Ouyi APP) as has been discussed, the fundamentals of bitcoin have begun to change to "American stock", so let's take a look at the performance of American stock in the previous interest rate increases and interest rate cuts since 2009?

It can be seen from the third-party data that after the birth of bitcoin in 2009, US stocks have been in a bull market. No matter whether interest rates are increased or reduced, there is only a short-term collapse caused by a short bear market or a black swan, which has been rising basically. The reasons can be summarized as follows:

First, because the Fed's interest rate hikes and cuts have a certain lag in the impact on fundamentals, and the economic cycle has a great inertia. For example, when the economy overheated and the Federal Reserve raised interest rates, it is said that US stocks should fall. However, from 2015 to 2018, the Federal Reserve raised interest rates nine times, but US stocks have been rising, only falling slightly in the final stage. Moreover, if interest rates are raised because of economic overheating, the overheating itself will raise most asset prices.

Second, US stocks have benefited from the rapid growth of a large number of technology companies during this period, such as Facebook, Amazon, apple, Netflix, Google and other companies. Their own development is of sufficient quality to offset the adverse impact of the Federal Reserve's monetary policy.

Of course, a simple search for the sword or comparison may not necessarily lead to a correct conclusion. We still need to analyze specific problems. Back to the bitcoin and encryption market, we also need to analyze them from two aspects:

In terms of the current economic environment, since the outbreak of the epidemic in 2020, the global economy has been greatly impacted. Therefore, the central bank represented by the Federal Reserve has opened the large-scale water release mode, which is conducive to the recovery and development of the economy, but also brings serious inflation. Therefore, the reason why the Federal Reserve wants to start raising interest rates this time can not be completely said to be the overheating of the economy, Curbing inflation is also an important goal. And now the development of the global economy is not particularly healthy. It is more like a prosperity bubble blown by unlimited water. This bubble has reached the time to squeeze. The key now is how to squeeze the bubble? If the interest rate increase is fierce and the bubble squeezing speed is too fast, all markets will be affected, and bitcoin and encryption market are no exception. If the interest rate increase is slow and the economy is soft, it depends on whether the bitcoin and encryption market itself is strong.

In terms of the development of bitcoin and the encryption market itself, this round of halving the market has seen great development from quantity to quality in the whole market. No matter the prosperity of defi, the gradual maturity of the public chain, the emergence of NFT and the popularity of metauniverse and Web3, it shows that the whole industry is in a high growth stage, So can this high growth offset the negative impact of the Fed's interest rate hike?

To sum up, whether the development speed and quality of bitcoin and the whole encryption market can offset the negative impact of the central bank's interest rate hike policy represented by the Federal Reserve will be the key factor for whether the encryption market can continue to take a bull market or even grow a bull market. After all, it still needs its own hard work to strike the iron.