Bitcoin's Bull Case Gains as Fed Cuts Loom

The recent release of U.S. inflation data has intensified speculation about the likelihood of a Federal Reserve rate cut, potentially signaling a shift in monetary policy that could benefit risk assets, including Bitcoin. The U.S. Consumer Price Index (CPI) remained at 2.9% year-over-year, while Core CPI (excluding food and energy) rose to 3.1%, the highest level since February. Concurrently, weekly unemployment claims reached 263,000, the highest since October 2021, further reinforcing concerns about the state of the labor market and economic growth. These developments have increased expectations that the Fed could introduce three 25-basis-point interest rate cuts before the end of the year.

Market sentiment is clearly reflected in the surge of odds for a rate cut. On Polymarket, the probability of a 25-basis-point cut ahead of the Federal Open Market Committee’s (FOMC) September 16–17 meeting has climbed to 84%, with a 50-basis-point cut and no cut standing at 13.1% and 2.4%, respectively. A 25-basis-point cut would reduce the federal funds rate by 0.25%, shifting monetary policy toward a more accommodative stance. Such a move would reduce borrowing costs, stimulate economic activity, and potentially weaken the U.S. dollar, making alternative assets like Bitcoin more attractive.

Bitcoin has historically responded positively to periods of accommodative monetary policy. The most notable example was in March 2020, when the Fed cut rates by 50 and 100 basis points in response to the economic fallout from the COVID-19 pandemic, driving rates to near zero. Although crypto prices initially declined amid panic selling, the influx of liquidity from quantitative easing eventually led to a significant rebound. Bitcoin, for instance, surged from around $5,000 in March 2020 to nearly $69,000 by November 2021. This pattern suggests that a new Fed easing cycle could have a similar effect on Bitcoin, especially as investors seek higher returns in risk assets amid lower interest rates.

However, the current trajectory of Bitcoin has shown some volatility. Following the release of the CPI data, Bitcoin rose above $114,500 but has since retreated, indicating that the market is still processing the inflation figures. Analysts suggest the price may dip to the $105,000 to $107,000 range before potentially rising to new highs above $124,000. Technical indicators, including a bullish MACD crossover on September 5, have also drawn attention as a potential sign of a trend reversal. This suggests that while the broader economic environment is becoming more favorable for Bitcoin, short-term volatility remains a factor.

The end of the "easy money" era for crypto treasuries could, paradoxically, be good for the crypto market. As traditional monetary policy shifts toward easing, liquidity returns to risk assets, which may favor Bitcoin and other cryptocurrencies. However, this transition is not without risks, as markets continue to assess the pace and scale of inflationary pressures before fully embracing a bullish stance. The next few weeks, particularly leading up to the FOMC meeting, will be crucial in determining the path forward for both interest rates and crypto prices.