Could an Interest Rate Cut from the Fed Help or Hurt Bitcoin?

Key Points

• If the Federal Reserve lowers interest rates, it could be a positive catalyst for Bitcoin.

• Lower rates increase investor appetite for speculation, which can boost cryptocurrencies.

• However, if a rate cut is accompanied by economic weakness, it can have the opposite effect.

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The Federal Reserve is widely expected to finally resume cutting interest rates after a long pause. In a nutshell, the Fed's dual mandate is to keep inflation under control and maximize employment, and it's often a balancing act.

Inflation has gravitated toward the Fed's 2% target, and it doesn't look like tariffs are causing the inflation spike many had feared, so the Fed appears ready to resume lowering benchmark interest rates toward historically neutral levels. According to the CME FedWatch tool, financial markets are pricing in a roughly 92% chance that we'll see a quarter-percentage point rate cut in September and a total of at least two cuts by the end of 2025.

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There are some types of assets that are clear beneficiaries. Real estate stocks, for example, are highly rate sensitive. But what about cryptocurrencies like Bitcoin (CRYPTO: BTC)?

Generally, lower rates are a positive catalyst for cryptocurrencies. We'll take a closer look at the reasons why, and what to expect.

Image source: Getty Images.

Lower rates could be a positive catalyst for Bitcoin

Bitcoin isn't a direct beneficiary of lower interest rates -- at least not in the sense that a real estate investment trust (REIT) or other type of rate-sensitive stock is. After all, REITs borrow money to fund their growth, and they are dividend-paying investment vehicles, and lower expected yields (in a falling-rate environment) have an inverse relationship with share prices.

However, Bitcoin can certainly be an indirect winner of falling rates. Lower benchmark interest rates mean that it costs less to borrow money, which leads to more liquidity in the financial markets.

In addition, lower interest rates mean lower yields from bonds and other income-focused investments. This means investors are less likely to stick with them, and we often see money rotate into nonincome investments (including cryptocurrencies). In other words, higher interest rates favor "safer" income-focused investments, while lower rates often incentivize investors to take on more risk.

Another potential catalyst is that lower-rate environments encourage investment in businesses. As borrowing becomes cheaper and investor appetite for speculation grows, cryptocurrency businesses get started or expand. Any growth to the overall cryptocurrency ecosystem or infrastructure is generally a positive catalyst for Bitcoin's price.

For example, we recently learned that cryptocurrency exchange Gemini is planning to go public in the near future. Investment in exchanges, blockchain applications, and other crypto-related business ventures can help boost Bitcoin.

Finally, not only is investor appetite for speculation likely to increase if the Fed cuts rates, but it also comes at a time when the ability to transact in Bitcoin and other cryptocurrencies is increasing. Thanks to regulatory clarity that says banks can indeed serve as cryptocurrency custodians, SoFi (NASDAQ: SOFI) is planning to bring back cryptocurrency trading by the end of the year on its platform, and it isn't likely to be the last bank to make such an announcement.

One big caveat

As a final thought: A falling-rate environment is likely to be a positive catalyst for Bitcoin and other cryptocurrencies, but only if the economy generally stays strong. If the U.S. economy were to enter a recession or economic data started to rapidly deteriorate, it could cause liquidity to dry up and could be a negative catalyst for Bitcoin demand.

As a real-world example, the Federal Reserve immediately cut rates to near-zero levels at the onset of the COVID-19 pandemic in March 2020. But because of the economic uncertainty that accompanies this aggressive rate cut, Bitcoin plunged by nearly 40% in one month.

The point is that interest rates aren't the only thing that will determine the direction of Bitcoin for the rest of 2025 and into 2026. It's just one piece of the puzzle.

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Matt Frankel has positions in SoFi Technologies. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.