đ° The US Federal Reserve has cut its benchmark interest rate by 50 bps for the first time since 2020, from 5.5% to 5%.
When the Fed cuts interest rates, it can affect Bitcoin and other cryptocurrencies in several ways:
1. Increase in demand for risky assets:
When interest rates fall, traditional investments such as bank deposits or bonds yield less income. Investors begin to look for better options, and some may turn to cryptocurrencies such as Bitcoin. This could lead to increased demand for Bitcoin and, as a result, an increase in its price.
2. The dollar is weakening:
A decrease in interest rates could weaken the dollar as foreign investors may choose to invest in other currencies or assets. If the dollar loses value, Bitcoin may be perceived as a way to preserve wealth, especially if it is considered "digital gold." This could also encourage people to buy Bitcoin, which increases its price.
3. Inflation expectations:
A rate cut could accelerate inflation, and in times of inflationary pressure, Bitcoin is sometimes seen as a "safe haven asset" because its supply is limited. People may start investing in Bitcoin to protect their savings from depreciation of national currencies, which could increase demand for the cryptocurrency.
4. Increase in liquidity:
When money becomes cheaper, more free funds appear on the market. These funds can be directed not only to traditional assets, but also to cryptocurrencies. This creates an additional flow of money into the Bitcoin market, which contributes to its growth.
5. High volatility:
While a rate cut could create a favorable environment for Bitcoin to rise, cryptocurrencies remain highly volatile assets. This means that even with an influx of new investment, Bitcoin's price can fluctuate wildly depending on market sentiment and external factors.
Thus, a rate cut could push investors towards Bitcoin as an alternative asset, especially if the dollar weakens or inflationary expectations begin.
However, it is important to remember that Bitcoin is always associated with risks due to its high volatility.
đ When the Fed lowers interest rates, money becomes cheaper for everyone and what often happens is:
Straightaway:
1. Borrowing is getting cheaper: People and companies are taking out more loans for homes, cars and businesses.
2. The economy is reviving: Increased spending by people accelerates economic growth.
3. Stocks are growing: Investors see growth potential in some companies (stocks) and invest in them. It is important to understand that not all of them are growing!
Later:
1. Inflation: More spending means higher prices for goods.
2. Business grows: Companies grow, creating new jobs.
3. The dollar is weakening: Fewer investors are investing in the dollar.
Long term:
1. Risks of overheating: Cheap money can lead to excessive debt.
2. Economic growth: If everything is balanced, the economy continues to grow.
3. The national debt is simplified: It is easier for the state to manage debt with low rates.
Lowering the rate is a boost to the economy, but it is important not to overdo it to avoid inflation and financial problems.
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