The Fed & Crypto: Lessons From Previous Easing Cycles

In Gemini’s latest analyst note, “The Fed & Crypto: Lessons From Previous Easing Cycles,” we look at the relationship between the Federal Reserve’s interest rate policy and cryptocurrency prices.

The report, produced in conjunction with research firm Praxis Veritas, had a few key takeaways:

• Markets respond positively to mid-cycle rate cuts: Historically, markets have reacted well to mid-cycle rate cuts, less so when they cut during a recession or external event that forces their hand. The expected rate cut in September is an example of the former, which bodes well for a spectrum of risk assets including crypto.

• Current economic data is not pointing to a recession: Despite the recent slowdown in hiring and other concerning economic indicators, the likelihood of a recession remains low when combining available information about the state of economic growth drivers. Financial conditions should remain accommodative or ease further if previous experience holds.

• There’s a long-term inverse relationship between financial conditions and crypto prices: When there was significant easing in financial conditions in 2016-17 and 2020-21, the price of bitcoin appreciated significantly (as well as in 2019 and late 2023). On the other hand, episodes of significant tightening in the FCI occurred around the bear markets of 2018 and 2022. The upcoming easing in financial markets should be a greenshoot for crypto.

• Easing financial conditions could hurt bitcoin’s dominance: Over the past six or seven years, bitcoin has shown to be less dominant when federal monetary policy eases, while alt coins make up a larger share of the market. Historically, it has taken about nine months for the changing fiscal policy to impact the crypto market.

Onward and Upward,
Team Gemini

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