Prediction: When the Federal Reserve starts cutting rates, this cryptocurrency will be a big winner | The Motley Fool

After the sharpest interest rate hikes in history, the Federal Reserve recently signaled that it could soon adjust policy. Markets expect a 25 basis point cut at the next meeting in September, with further cuts likely in 2025.

Several assets are likely to benefit from these adjustments, but one in particular is better positioned in this evolving landscape. Here’s why Bitcoin (BTC -3.54%) is what asset investors should watch as the Fed moves from hawkish to dovish.

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The current landscape

While people celebrated Federal Reserve Chairman Jerome Powell’s announcement that rate cuts are coming, there are reasons to be less optimistic. Based on recent data and developments, the decision to cut rates appears to be driven by concerns such as the recent yen exchange and the Bureau of Labor Statistics review, which revealed a significant increase of 818,000 jobs. These developments fueled fears of a fragile global economy and a weakening labor market, which ultimately led the Fed to consider easing its stance.

However, the inflation rate is still 2.9%, well above the Federal Reserve’s long-held target of 2%, and one Powell had previously declared non-negotiable. In addition, the US economy remains relatively robust. Since the COVID-19 pandemic, the United States has experienced only two quarters of negative gross domestic product (GDP) growth, a key metric for measuring economic productivity. Also, the latest estimate of real GDP for the third quarter of 2024 is a solid 2%. This suggests that the economy is not struggling under overly tight monetary policy.

It’s not hard to see how rate cuts could cause inflation to rise again in this scenario. Lower interest rates encourage borrowing and spending, which increases the demand for goods and services. This increased demand in a seemingly healthy economy puts additional upward pressure on prices and further complicates the Federal Reserve’s efforts to maintain price stability.

Bitcoin: The main asset

While increased liquidity and lower interest rates often lead to higher growth in stocks as investors are incentivized to take more risk, in this environment I would prefer a different asset: Bitcoin.

Considered the primary risk asset, Bitcoin has proven to thrive when there is more liquidity in the market. From when the Fed cut rates to near zero in February 2020 to February 2022, when rate hikes resumed, Bitcoin saw a staggering 375% jump. Its performance in that low-rate environment underscores its potential as rates begin to fall again.

But the main reason why Bitcoin is so attractive today is not just to benefit from greater liquidity; it is about safeguarding against inflation. In an economy that does not appear to be in trouble, the likelihood of inflation returning is significant. After the US dollar lost 20% of its value in the last five years, I have no interest in going back to that scenario.

Fortunately, Bitcoin offers a solution. With a fixed supply of 21 million coins, of which 19.6 million are already in circulation, Bitcoin offers a unique hedge against central bank malpractice and government intervention. Its decentralized nature means that it is not controlled by any entity and its underlying blockchain technology ensures security and transparency. These characteristics make Bitcoin not just a speculative asset, but a solid store of value in an uncertain economic landscape.

Final considerations

The Federal Reserve’s rate cuts have been a long time coming and will undoubtedly boost the economy. But that doesn’t necessarily mean there aren’t potential consequences or other issues that arise.

If economic growth can somehow be managed with minimal inflation, then kudos to Powell. But without guarantees, I prefer to trust the most decentralized, secure and finite asset out there.

For investors looking to navigate these choppy waters, Bitcoin represents not just a speculative play, but a strategic allocation in a world where traditional assets are increasingly subject to the whims of central banks.