The week ahead promises to be a busy one for financial markets and Bitcoin (BTC) will be no exception.
On Wednesday, September 18, the US Federal Reserve (Fed) will hold a meeting at which it will decide whether to cut interest rates.
Apparently, that will be the case. Let us remember that, as CriptoNoticias reported, it was the same Fed president, Jerome Powell, who at the end of August said that “The time has come to adjust monetary policy”.
The remarks came on August 23 during a conference that brought together central bankers, ministers, economists and academics from around the world to discuss economic, stock market and monetary issues affecting global economies.
The market also believes that interest rates will be cut. On Polymarket, a prediction betting site, 98% of bettors believe that there will be interest rate cuts on Wednesday.
As can be seen in the following graph, If such a rate cut were to occur, it would be the first since 2020.:
What does bitcoin have to do with US interest rates?
The relationship between interest rates and bitcoin is key to understanding its price movements. A cut in interest rates by the Fed (central bank of the United States, the main financial power worldwide) generally It means that it is cheaper to get loansWhen borrowing costs fall, investors have more incentive to borrow money and place it in riskier assets, such as bitcoin, cryptocurrencies in general, and stocks. This can boost demand for BTC, which tends to be reflected in an increase in its price.
Historically, bitcoin has shown a strong correlation with other risk assets in these contexts. For example, when the Federal Reserve kept rates at near-zero levels during the COVID-19 pandemic, bitcoin experienced one of its biggest bullish impulses, reaching all-time highs in late 2021. Investors were looking for profitable alternatives while rates remained low and bond yields were unattractive.
On the other hand, when interest rates riseas was the case during 2022 and 2023, risk assets like bitcoin tend to be negatively affected. The reason is that Treasury bondsconsidered one of the safest investments in the world, begin to offer better returns in a high rate environment, diverting capital from riskier markets towards investments with lower risk but higher guaranteed returns.
This phenomenon creates what can be considered a “self-fulfilling prophecy” in financial markets. Many investors assume that when rates fall, bitcoin will rise, which leads to early purchases in anticipation of this increase. In turn, this additional demand causes an actual increase in the price of BTC, fulfilling market expectations. The same happens in reverse: when a rate increase is expected, the price of bitcoin tends to fall, as investors anticipate less incentive to hold risky assets.
Added to this is the fact that low interest rates also have an indirect impact on bitcoin through the weakening of the US dollar. When rates are low, the dollar tends to lose value against other currencies, which can make bitcoin, which is traded globally and is seen by some as an “alternative asset” to the dollar, more attractive.
A week of high volatility is coming for bitcoin
In a context like the one explained here, The only thing that is certain for bitcoin in the short term is that it will be a week of high volatilityThe price of Bitcoin could, perhaps, rise between now and Wednesday, awaiting the Fed’s announcements.
Likewise, once the long-awaited announcements are made, it would not be unusual to see “violent” movements in the price of BTC, both upwards and downwards. Downward movements could occur either due to a “sell-off of the news” or because the announcements are not as good as the market expected.
Even if the rate cut were too abrupt, it could be taken negatively by the market because it would signal that the Fed is concerned about a significant weakening of the economy. Instead of interpreting the cut as an opportunity, investors could view it as a sign that the economy is in deeper trouble than expected, triggering a sell-off in search of safer assets.
In contexts of high volatility such as the one expected for bitcoin this week, One strategy that may be helpful is dollar cost averaging (DCA).This strategy involves buying small amounts of bitcoin periodically, regardless of the price, rather than trying to guess when the best time to buy will be. This reduces the impact of volatility and the risk associated with entering the market at a bad time.
DCA is especially valuable in times of uncertainty, such as when major announcements from the Federal Reserve are expected, as it prevents investors from getting caught up in short-term price fluctuations. Rather than betting on a one-time market move, the focus is on accumulating bitcoin over time, smoothing out extreme swings.
While it doesn’t guarantee getting the best possible price on every purchase, DCA offers the advantage of avoiding emotionally-based decision making, which can be key when market movements are unpredictable and volatile. For those who believe in the long-term value of bitcoin, this strategy can be a useful tool to weather volatility and take advantage of the asset’s overall trend without exposing themselves too much to short-term risks.
Disclaimer: The views and opinions expressed in this article belong to the author and do not necessarily reflect those of CriptoNoticias. The author’s opinion is for informational purposes only and does not constitute investment advice or financial advice under any circumstances.