When the Fed cuts interest rates or conducts quantitative easing (QE), more money flows into the economy. Some of this liquidity can flow into cryptocurrencies, including bitcoin, increasing demand and prices. Conversely, rate hikes and quantitative tightening (QT) reduce liquidity, which can negatively affect the BTC price.
The Fed's loose monetary policy could fuel inflation concerns. During such periods, bitcoin is often seen as a hedge against fiat currency depreciation, which increases its investment appeal. But this does not always work, as the flagship digital currency may come under pressure due to regulatory risk.
The Fed's decisions directly affect the value of the dollar. When rates are cut or QE is launched, the dollar usually weakens, making bitcoin more attractive as its dollar value rises.
During periods of dovish Fed policy, investors are more risk-averse and are more willing to invest in high-risk assets, including cryptocurrencies. When policy tightens, a flight to quality occurs as investors prefer more reliable assets like US government bonds.
Actions that have a positive impact on the bitcoin price include:
- Lower interest rates with lower inflation
- Launch of quantitative easing programs
- Signals that the Fed will adhere to a long-term accommodative monetary policy
Actions that have a negative impact:
- Raising interest rates when inflation rises
- Phasing out QE programs and moving to QT
- Statements about the need to tighten monetary policy
It’s important to note that the Fed's impact on Bitcoin is not direct, but indirect through its impact on broader financial markets and investor sentiment. Bitcoin, as part of the global financial system, responds to changes in monetary policy, demonstrating links with traditional financial markets and the US dollar.