The Federal Reserve Board of Governors stated that "it is necessary to cut interest rates as soon as possible," and the "Beige Book" shows that the economy is showing some signs of slowdown (such as a decline in consumer spending). This is a perfect case for analyzing how monetary policy affects the market.

Overall, the Fed's interest rate hikes and cuts mainly affect the cryptocurrency market through the following core channels:

1. The impact of the Fed's interest rate cuts on the cryptocurrency market (positive)

As suggested by the image, the imminent interest rate cut typically has a positive impact on the cryptocurrency market. The impact pathway is as follows:

1. Lower opportunity cost and enhance the attractiveness of risk assets.
* Principle: The interest rate can be considered as the "risk-free rate of return." When the Fed lowers interest rates, the returns on traditional low-risk assets such as bank deposits or purchasing government bonds will decrease.
* Impact on cryptocurrencies: Cryptocurrencies are seen as high-risk, high-potential return assets. When risk-free yields decrease, investors' willingness to hold cash or government bonds diminishes, and they become more willing to invest in risk assets such as cryptocurrencies in search of higher returns. This is known as "increased risk appetite."
2. Reduce financing costs and increase market liquidity.
* Principle: Lowering interest rates means that the borrowing costs for individuals and businesses (such as loans, mortgage interest) become lower.
* Impact on cryptocurrency:
* For investors: Lower financing costs may encourage investors to leverage through borrowing to invest in the cryptocurrency market.
* Overall Market: A more accommodative monetary policy will inject more liquidity into the financial system (i.e., more money circulating in the market). A portion of this excess "hot money" is likely to flow into the cryptocurrency market, driving up asset prices. This is commonly referred to as "a rising tide lifts all boats."
3. Potential inflation expectations and the "hedging" narrative
* Principle: The Fed's interest rate cuts are usually aimed at stimulating economic growth and preventing the risk of deflation. However, excessive easing policies may also trigger market concerns about future inflation.
* Impact on cryptocurrencies: Cryptocurrencies like Bitcoin are viewed by some investors as a hedge against inflation, similar to "digital gold", due to their fixed supply (e.g., Bitcoin's cap of 21 million coins). If interest rate cuts lead to rising market inflation expectations, it may attract investors to purchase cryptocurrencies to protect their wealth from the erosion of currency depreciation.

Context Summary: The Fed is considering cutting interest rates due to signs of economic weakness, which aligns with the logic above. The market expects liquidity to become more accommodative, with funds flowing from low-yield traditional assets to high-risk, high-yield crypto assets, which could potentially drive up cryptocurrency prices.

2. The Impact of US Interest Rate Hikes on the Cryptocurrency Market (Negative Impact)

The impact path of interest rate hikes is basically the opposite of that of interest rate cuts, and it usually puts pressure on the cryptocurrency market.

1. Increase opportunity costs, funds flow to traditional finance
* Principle: Raising interest rates will increase the yield on risk-free assets (such as government bond interest and bank deposit interest).
* Impact on cryptocurrencies: Investors may feel that since they can obtain considerable and stable returns without taking any risks, why should they take the risk of holding highly volatile cryptocurrencies? This could lead to funds flowing out of risky markets like cryptocurrencies and returning to the traditional financial system. This is referred to as a "decline in risk appetite" or "increased risk aversion."
2. Raise financing costs and tighten market liquidity
* Principle: An interest rate increase means that borrowing costs rise.
* Impact on cryptocurrency:
* For investors: The cost of leveraged investments has significantly increased, which will force some leveraged investors to sell cryptocurrencies to repay loans, leading to increased selling pressure.
* Overall to the market: Tight monetary policy will withdraw liquidity from the market (less money and more expensive). The tightening of funds will directly lead all risk assets, including cryptocurrencies, to face downward pressure.
3. Suppress speculative sentiment and strengthen risk-averse mentality.
* Principle: Interest rate hikes are usually aimed at combating high inflation and cooling down the economy. This sends a signal that the economy may be overheating and there is uncertainty ahead.
* Impact on cryptocurrencies: In this environment, investors' mentality tends to be conservative, preferring to hold cash or safe assets like the US dollar, while reducing allocations to speculative assets such as cryptocurrencies.

3. Complexity and Other Factors to Consider

Although interest rate hikes/cuts are one of the decisive factors, the cryptocurrency market is also influenced by other complex factors, and it cannot be simply equated.

* The Importance of Market Expectations: The market often "buys expectations and sells facts." For example, the market may start to rise long before the Fed actually announces a rate cut, due to expectations. By the time the rate cut is actually implemented, prices may instead correct because the positive news has been fully priced in. The term "set in stone" used in the image reflects that this "expectation" has already formed.
* Macroeconomic Background: The reasons for interest rate hikes/cuts are equally critical. For example, a "preventive interest rate cut" during healthy economic growth is positive for the market. However, an "emergency rate cut" when the economy is on the brink of recession may trigger market panic about an economic crisis, potentially leading to a crash in all assets (including cryptocurrencies).
* Factors related to cryptocurrencies themselves: The impact of internal industry events may far exceed macro factors. For example, significant changes in regulatory policies (such as ETF approval or prohibition), technological breakthroughs of leading projects, and exchange collapses, can all influence market trends independently of Fed policies.

Summary

Monetary policy core impact mechanism typical impact on the cryptocurrency market
Lowering interest rates reduces opportunity costs, increases market liquidity, and stimulates risk appetite. This is favorable and tends to drive prices up. Funds will flow from low-yield assets to high-risk assets.
Interest rate hikes increase opportunity costs, tighten market liquidity, and strengthen risk aversion. This is negative news, likely leading to price declines or pressure. Funds will flow back from high-risk assets to low-risk assets.

The Fed signals a rate cut - this is a typical precursor to a bullish cryptocurrency market. It indicates a more accommodative financial environment and lower capital costs, which usually attract investors to enter the cryptocurrency market in search of excess returns.

Therefore, understanding the Fed's monetary policy trends is a very important aspect of analyzing the macro trends in the cryptocurrency market.