The Trump administration has gained some ground on Federal rate cuts this week, with the Fed trimming the federal funds rate by 0.25 percentage points (25 basis points) in an 11-1 vote, though Trump’s fresh appointee Stephen Miran dissented, pushing for a bolder half-point drop to match the president’s demands. This modest action, though, cranks up market liquidity, and if rates keep falling as projected (two more trims by year-end), we’ll likely see an investment boom as borrowing and capital costs plummet.
While there’s no direct correlation between interest rate slashes and the crypto market, there’s a clear observed trend: stereotypical “riskier investments” like crypto get a solid tailwind from Fed cuts, as seen in Bitcoin’s 0.9% surge to over $116,000 right after this one.
So what’s in the crypto tea leaves?
This isn’t a psychic endeavour, although J.P. Morgan did famously predict markets based on astrology, but let’s not digress into those realms. Let’s review some indicators of crypto market confidence.
Fed Rate: Well, Fed cut rates are by no means the barometer of the crypto market, but they do indicate a broader appetite to invest in the less traditional, as demonstrated by historic booms in tech stocks upon announcement. This is because the cost of borrowing to invest becomes lower, leading to widespread institutional investments.
Erosion of Trust: The single most important element to any monetary system is trust; without trust and the promise to pay, as we see on paper cash, the paper loses its value. So erosion of trust in centralised banks and other financial outfits leads to booms in the crypto market. Surveys show 40% of Americans would use DeFi if rules were clear, underscoring widespread distrust in banks.
Institutional Adoption: You can think of it a bit like this: when a new artist enters the charts, what determines success is how much people buy into their music. Although Queen famously smashed through the institutional ceiling with their hit and critically denied album A Night at the Opera, for the most part, institutional adoption is important and certainly outside of the creative arts. You could look at it as a graduation from fans waving your flag to serious capital being put up to build your castle. A famous example of institutional adoption is Tesla and their bold Bitcoin treasury bet. Dropping $1.5 billion into BTC back in 2021. (Link to our article on this)
On-Chain Efficiency: On-chain efficiency is part of the legitimisation factor. Crypto has proven more resilient than traditional banking rails, a cost-effective vehicle and ultimately a much better one for settlement of payments. The infrastructure and investment in blockchain technology that underpins crypto leads towards greater market confidence with fraud instances markedly lower than in traditional systems and features like immutable ledgers slashing transaction costs and boosting speed, as seen in networks like Bitcoin and Ethereum.
Remember, this list is by no means exhaustive, but it gives you a window into what can shift the crypto market and what indicators to look out for when you are hunting for the next big thing!