Bitcoin’s price has made a rapid recovery in the past 12 hours, reaching the $61,000 level again after the S&P 500 hit a new all-time high. The market is preparing for potential volatility ahead of the Federal Open Market Committee (FOMC) meeting and rate cut announcements, which could impact both the US stock market and the cryptocurrency industry.
There is currently an increasing correlation between Bitcoin and major US stocks, which can provide insight into what may happen based on historical performance after previous rate cuts.
The S&P 500 index is a key indicator of the overall US market trend, representing a wide range of companies in various sectors. Its value was $45.84 trillion in June 2024. The index is currently in an uptrend, reaching a new all-time high of 5670 just before the FOMC meeting. Speculation suggests that traders are anticipating a 0.50 basis point or 0.5% rate cut.
However, historically, when interest rates have been cut, the SPX index has typically experienced a short-term decline. Since 1984, the US Federal Reserve has implemented rate cuts 10 times, and during the one-month period following these cuts, the SPX’s return on investment (ROI) has been negative 60% of the time. The two rate cuts in 2019 and 2020 also resulted in immediate corrections.
Therefore, there is a high likelihood that any rate cut could have a short-term negative impact on the SPX. A cautious 0.25% cut could trigger a more significant pullback, considering that the market has already priced in a 0.5% cut.
Bitcoin and the S&P 500 have shown periods of strong correlation in recent years, particularly during the bull market in 2021. The correlation coefficient (CC) between BTC and SPX is currently 0.88, indicating that they are moving in tandem. This correlation is expected to continue after the FOMC meeting.
If the SPX experiences a downturn, Bitcoin is likely to follow suit, as it has not broken its downtrend that has been ongoing for several months. If there is a correction in Bitcoin following the interest rate cut, the immediate target range is $54,000, where a CME futures gap was formed at the beginning of September. However, the drawdown could be even deeper, potentially reaching previous lows at $48,880.
Despite this bearish scenario, it is important to note that it is based on the short-term timeframe for Bitcoin and the S&P 500. Historical data suggests that the SPX has generated positive returns over the three-, six-, and 12-month periods when the market has not faced a recession. The risk of a recession in the US currently remains relatively low compared to March 2024, indicating that the economy is gradually improving. If a recession can be avoided, the SPX should overcome any short-term volatility from the rate cuts and continue its bullish trend. This would likely be beneficial for risk-on assets like Bitcoin in the fourth quarter.
Please note that this article does not provide investment advice or recommendations. All investment and trading decisions involve risk, and readers should conduct their own research before making any decisions.