Will raising interest rates end the bull market?

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

In the case that the Fed's interest rate hike in 2022 is almost a foregone conclusion, many people are worried that this will directly end the bull market. Realistically speaking, this kind of worry is very reasonable, because the Fed's interest rate hike is more negative for the entire 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 we want to make it clear, we may need to open a separate column, and we will talk about it later. Here we only say one thing: will the encryption market definitely fall if interest rates are raised? On the contrary, will interest rate cuts definitely go up?

Let's talk about the answer first: not necessarily. The actual ups and downs may be just the opposite of interest rate cuts and interest rate hikes. More importantly, what are the reasons for raising interest rates and cutting interest rates? What was the development stage of the economic environment and the encryption market itself at that time?

So historically, how will the Fed raise interest rates and cut interest rates cause bitcoin to rise and fall?

On January 3, 2009, the first bitcoin was officially dug up. In the following seven years, that is, until December 2015, due to the economic recession caused by the subprime mortgage crisis, the Fed's interest rate remained at 0.25%. Bitcoin has completed the development from 0 to 1. During this period, because Bitcoin is still in the early stage of development and there is no mainstream capital intervention, the rise and fall of Bitcoin at this stage is mainly affected by its own halving cycle, and the Federal Reserve's monetary policy 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 become relatively overheated. So the Federal Reserve raised interest rates nine times in three years, and until December 2018, the interest rate was increased from 0.25% to 2.5%. During this period, Bitcoin just experienced the second halving and started the second halving market. 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 at the end of 2017, with the highest drop of 85%.

At this stage, although the rise and fall of Bitcoin is still more affected by its own halving, the Federal Reserve's monetary policy has had a huge impact on the rise and fall of Bitcoin. Basically, every time the Federal Reserve announces a rate hike, Bitcoin will fall in a short time. Four intensive crazy interest rate hikes in 2018 directly ended the bull market.

Beginning in 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 experienced a collapse, and the encryption market also experienced a memorable "3.12" plunge. The Federal Reserve lowered its interest rate by 1% at a time. During this period, the Federal Reserve cut interest rates five times, and the interest rate dropped from 2.5% to 0.25%. Bitcoin gradually rebounded after the Federal Reserve announced the suspension of interest rate hikes in March 2019, and a small bull market appeared. However, the emergence of the black swan, the COVID-19 epidemic, led to the "3.12" crash of Bitcoin and the whole 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. With the intervention of institutions represented by Wall Street and "Old Money", Bitcoin gradually became "American" and gradually resonated with the mainstream market.

Since March, 2020, the Federal Reserve's interest rate has been kept at 0%-0.25%, and Bitcoin has been halved for the third time. As we can see, Bitcoin has stepped out of a big bull market with a great momentum and reached the current historical high of $69,040 in November, 2021. Later, as the Federal Reserve gradually began to reduce its bond purchases and announced that it would start raising interest rates, people's interest rate expectations became stronger and stronger.

To sum up, with the "mainstreaming" and "Americanization" of Bitcoin, the change of the Federal Reserve's monetary policy has an increasing impact on the rise and fall of Bitcoin, and even determines the bull-bear form of Bitcoin to a great extent. At this stage, the Federal Reserve's monetary policy is a bit like that in 2015, on the eve of ending QE and raising interest rates. After 2015, Bitcoin experienced the process of rising bulls and bulls and bears in two and a half years.

Compared with US stocks, will interest rate hikes and interest rate cuts definitely fall/rise?

If we compare history, will Bitcoin be like a bull market and then a bear market after the Federal Reserve raised interest rates in 2015? To answer this question, we need to analyze the current situation of Bitcoin itself. Compared with before, the fundamentals of Bitcoin have been very different. In our original article: "Bitcoin" Americanized, the boundary between bull and bear will gradually blur? As already discussed, the fundamentals of Bitcoin have begun to shift to "Americanization", so let's take a look at the performance of US stocks in previous interest rate hikes and interest rate cuts since 2009.

As can be seen from the third-party data, after the birth of Bitcoin in 2009, US stocks have been in a bull market. Regardless of interest rate hikes or interest rate cuts, there has only been a short-term bear market or a short-term crash caused by black swans, and the fundamentals have been rising. The reason can be simply summarized as the following two points:

First, because the impact of the Fed's interest rate hike and interest rate cut on the fundamentals has a certain lag, the economic cycle has a very large inertia. For example, if the economy is overheated and the Federal Reserve raises interest rates, it should be 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 slightly falling in the final stage. Moreover, if interest rates are raised because of overheating, then overheating itself will raise the prices of most assets.

Second, US stocks themselves 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, and their own development was of sufficient quality to offset the adverse effects of the Fed's monetary policy.

Of course, simple carving a boat for a sword or comparison may not necessarily lead to a correct conclusion, but it still needs specific analysis. Back to the bitcoin and encryption market, we also need to analyze it from two aspects:

From the current economic environment, since the outbreak of the epidemic in 2020, the global economy has suffered a huge impact. Therefore, the central bank represented by the Federal Reserve has launched a large water release model, which is conducive to economic recovery and development, but it has also brought serious inflation. Therefore, the reason why the Federal Reserve wants to raise interest rates this time cannot be completely said to be overheating, and curbing inflation is also an important purpose. And now the development of the global economy is not particularly healthy, but more like a prosperous bubble blown by unlimited water. This bubble has reached the point where it has to be squeezed. Now the key is how to squeeze the bubble. If the interest rate hike is fierce and the bubble is squeezed too fast, then all markets will be affected, and the bitcoin and encryption markets are no exception. If the interest rate hike is slow and the economy is soft, then it depends on whether the bitcoin and encryption markets themselves are excellent.

Judging from the development of bitcoin and encryption market itself, this round of halving the market has seen a great development from quantity to quality. No matter the prosperity of DeFi, the gradual maturity of the public chain, or the NFT's going out of the circle and the popularity of Metauniverse and Web3, it shows that the whole industry is in a high growth stage. Can this high growth offset the negative impact of the Fed's interest rate hike? On the whole, whether the development speed and quality of Bitcoin and the whole encryption market can finally 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 cow. After all, it is necessary to be hard to strike while the iron is hot.

Finally, this article is only for reference, not as investment advice. The market is risky and you need to be cautious when entering the market.