Reviewing the Fed's interest rate cut cycle, where will Bitcoin, the stock market, and gold go from here?

Written by: David, Deep Tide TechFlow

"Let's take a break and act after the Federal Reserve's decision." In recent days, there has been no shortage of cautious sentiment in the investment community.

At 2 a.m. Beijing time on September 18, the Federal Reserve will announce the latest interest rate decision. This will be the 5th monetary policy meeting since the rate cut in September last year. The market expects a further reduction of 25 basis points, from the current 4.5% to 4.25%.

A year ago at this time, everyone was waiting for the start of the interest rate cut cycle. Now, we are already halfway through the rate cuts.

Why is everyone waiting for this shoe to drop? Because history tells us that once the Federal Reserve enters a rate-cutting cycle, various assets often experience a surge in price.

So where will Bitcoin go with this rate cut? How will the stock market and gold perform?

Reviewing the Federal Reserve's interest rate cut cycles over the past 30 years, we may find answers from historical data.

What type of interest rate cut cycle are we standing at the starting point of?

Historically, the Federal Reserve's interest rate cuts have never been a simple action.

Sometimes, a rate cut is a shot in the arm for the economy, and the market responds with a surge; but at other times, a rate cut may be a prelude to a storm, indicating that a larger crisis is on the horizon, and asset prices may not necessarily rise in response.

In 1995, preemptive interest rate cuts.

At that time, the Federal Reserve Chairman Alan Greenspan faced a "happy trouble": the economy was growing steadily, but there were signs of overheating. So he chose to implement a "preemptive rate cut," lowering it from 6% to 5.25%, for a total reduction of only 75 basis points.

What was the result? The U.S. stock market ushered in the most glorious 5-year bull market of the Internet era, with the Nasdaq index rising 5 times over the next 5 years. It can be called a textbook soft landing.

In 2007, a bailout-style interest rate cut.

As depicted in the movie "The Big Short," the trend of the subprime mortgage crisis had already emerged, but few were aware of the scale of the storm. In September of that year, when the Federal Reserve began cutting interest rates from 5.25%, the market was still in a frenzy, and the S&P 500 index had just reached an all-time high.

But everyone knows the script that followed: Lehman Brothers collapsed, a global financial tsunami ensued, and the Federal Reserve had to lower interest rates from 5.25% to 0.25% within 15 months, a reduction of 500 basis points. This rescue came too late and still failed to prevent the economy from falling into the most severe recession since the Great Depression.

In 2020, panic interest rate cuts.

No one could have predicted the "black swan" of the coronavirus outbreak. On March 3 and March 15, the Federal Reserve made two emergency rate cuts, dropping from 1.75% to 0.25% in just 10 days. At the same time, it initiated "unlimited quantitative easing," expanding its balance sheet from $4 trillion to $9 trillion.

This unprecedented level of monetary easing has created one of the most surreal scenes in financial history: the real economy has come to a standstill, yet financial assets are in a frenzy. Bitcoin soared from $3,800 in March 2020 to $69,000 in November 2021, an increase of more than 17 times.

Looking back at these three interest rate cut models, you can also see three similar results in terms of asset changes, but with different processes:

Preventive Rate Cut: Slight rate cut, soft landing of the economy, steady rise in assets

Relief-style interest rate cut: Significant interest rate reduction, hard landing of the economy, assets fall first and then rise.

Panic Rate Cuts: Emergency rate cuts, extreme volatility, asset V-shaped reversal

So in 2025, which script are we at the beginning of?

From the data perspective, it now resembles the preemptive rate cuts of 1995. The unemployment rate is 4.1%, which is not high; GDP is still growing without recession; inflation has fallen from a peak of 9% in 2022 to around 3%.

But there are also a few unsettling details worth noting:

Firstly, the stock market was already at a historical high during this rate cut, with the S&P 500 having risen over 20% this year.

Historically, when interest rates were cut in 1995, the stock market had just recovered from a low; while in 2007, the stock market was at a high, and then it crashed. Furthermore, the U.S. government debt as a percentage of GDP has reached 123%, far exceeding the 64% in 2007, which also limits the space for government fiscal stimulus.

But regardless of the interest rate cut model, one thing is certain: the floodgates of liquidity are about to open.

The Interest Rate Cut Scenario in the Crypto Market

This time, what will happen to the crypto market when the Federal Reserve turns on the faucet again?

To answer this question, we first need to understand what the crypto market experienced during the last round of interest rate cuts.

From 2019 to 2020, when a market with a market capitalization of only 200 billion USD suddenly welcomed a trillion-dollar liquidity, the entire process of asset appreciation was not instantaneous.

2019 Interest Rate Cut Cycle: Big Thunder but Little Rain

On July 31 of that year, the Federal Reserve cut interest rates for the first time in ten years. This should have been a significant positive for the cryptocurrency market at the time.

Interestingly, Bitcoin seems to have received the news ahead of time. At the end of June, Bitcoin started rising from $9,000 and had reached $13,000 by mid-July. The market is betting that interest rate cuts will bring about a new bull market.

But when the interest rate cut really came, the trend was surprising. On July 31, the day of the rate cut, Bitcoin fluctuated around $12,000, and then instead of rising, it fell. In August, it fell below $10,000, and by December, it had dropped to around $7,000.

Why is this happening? Looking back, there may be several reasons.

First, a rate cut of 75 basis points is relatively moderate, and the liquidity release is limited. Second, at that time, the crypto market had just come out of the bear market of 2018, and investor confidence was lacking.

Most importantly, traditional institutions are still observing, and the funds from this round of interest rate cuts have mainly flowed into the stock market, with the S&P 500 rising nearly 10% during the same period.

2020 Interest Rate Cut Cycle: Super Roller Coaster After the 312 Disaster

In the first week of March, the market has already sensed the smell of crisis. On March 3, the Federal Reserve urgently cut interest rates by 50 basis points, and Bitcoin not only failed to rise but instead fell from $8,800 to $8,400. The market's logic is: emergency rate cut = major economic issues = better to run first.

The next week was the darkest moment for the cryptocurrency market. On March 12, Bitcoin fell directly from $8,000 to $3,800, with a drop of over 50% in 24 hours. Ethereum fared even worse, dropping from $240 to $90.

The classic "312" tragedy has become a collective traumatic memory of the cryptocurrency market.

The plunge that day was actually part of a global liquidity crisis. Amid the panic of the pandemic, all assets were being sold off—stock market circuit breakers, gold prices dropping, and U.S. Treasuries also falling. Investors were frantically selling everything for cash, and even "digital gold" Bitcoin could not escape.

What’s worse is that the high leverage in the crypto market magnified the decline. On derivatives exchanges like BitMEX, a large number of 100x leveraged long positions were liquidated, and the cascading liquidations occurred like an avalanche. Within a few hours, the total liquidation amount across the network exceeded 3 billion dollars.

But just when everyone thought it was going to zero, the turning point came.

On March 15, the Federal Reserve announced a cut in interest rates to 0-0.25% and simultaneously launched a $700 billion quantitative easing (QE). On March 23, the Federal Reserve further implemented the "infinite QE" strategy. After bottoming out at $3,800, Bitcoin began an epic rebound:

March 13, 2020: $3,800 (low)

May 2020: $10,000 (2 months increase 160%)

October 2020: $13,000 ( increased by 240% over 7 months

December 2020: $29,000 ( increased by 660% over 9 months

April 2021: $64,000 (13 months increase 1580%)

November 2021: $69,000 (20 months increase 1715%)

Not just Bitcoin, the entire cryptocurrency market is in a frenzy. Ethereum surged from $90 to a peak of $4,800, an increase of 53 times. Many DeFi tokens skyrocketed by hundreds of times. The total market capitalization of the cryptocurrency market expanded from $150 billion in March 2020 to $3 trillion in November 2021.

Why was the market reaction so different between the interest rate cuts in 2019 and 2020?

Looking back, the answer is very simple: The intensity of interest rate cuts determines the scale of funds.

In 2020, it dropped directly to zero, plus unlimited QE, which is equivalent to opening the floodgates. The Federal Reserve's balance sheet expanded from 4 trillion to 9 trillion dollars, suddenly adding 5 trillion dollars of liquidity to the market.

Even if only 1% flows into the cryptocurrency market, that is $50 billion. This is equivalent to one-third of the total market capitalization of the entire cryptocurrency market at the beginning of 2020.

In addition, players in 2020 experienced a shift in mentality from extreme panic to extreme greed. In March, everyone was selling off all assets for cash, and by the end of the year, everyone was borrowing money to buy assets. This dramatic fluctuation in sentiment amplified the price volatility.

More importantly, institutions have also entered the market.

MicroStrategy started buying Bitcoin in August 2020, accumulating over 100,000 coins. Tesla announced the purchase of $1.5 billion in Bitcoin in February 2021. The holdings of the Grayscale Bitcoin Trust (GBTC) grew from 200,000 coins at the beginning of 2020 to 650,000 coins by the end of the year.

The purchases by these institutions not only brought real money but, more importantly, brought a endorsement effect.

2025, History Repeats?

In terms of the magnitude of interest rate cuts, the market expects a 25 basis points cut on September 17, which is just the beginning. Based on the current economic data, the entire interest rate cut cycle (over the next 12-18 months) may accumulate to a total cut of 100-150 basis points, with the final rate possibly dropping to around 3.0-3.5%. This range is between the 175 basis points cut in 2019 and the zero rate in 2020.

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From a market position, Bitcoin is already near its historical high of $115,000, with not as much room for a significant increase as in March 2020. On the other hand, it is also not like in 2019 when it had just come out of a bear market, and market confidence is relatively strong.

From the perspective of institutional participation, the approval of Bitcoin ETFs is a watershed moment. In 2020, institutions were tentatively buying in, but now there are standardized investment tools available. However, institutions have also become smarter and will not FOMO chase highs like they did in 2020-2021.

Perhaps, in 2024-2025, we will see a third scenario, neither the dullness of 2019 nor the madness of 2020, but rather a "rational prosperity." Bitcoin may not have a 17-fold increase again, but a steady rise as liquidity gates open is a more convincing logic.

The key also depends on the performance of other assets. If the stock market and gold are both rising, funds will be diverted.

Performance of Traditional Assets in a Rate Cut Cycle

The interest rate cut cycle not only affects the cryptocurrency market, but the performance of traditional assets is also worth paying attention to.

For crypto investors, understanding the historical performance patterns of these assets is crucial. Because they are both sources of funds and competitors.

) U.S. Stocks: Not Every Rate Cut Leads to a Bull Market

According to research data from BMO, we can see the detailed performance of the S&P 500 during the interest rate cut cycles over the past 40 years.

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History shows that the S&P 500 index tends to experience positive returns within 12 to 24 months after the Federal Reserve first cuts or resumes interest rates.

Interestingly, if we exclude the technology bubble )2001( and the financial crisis )2007( from the table, the average returns of the S&P 500 before and after interest rate cuts would be higher.

This precisely illustrates the problem. The average return of the S&P 500 in the US stock market is merely a reference; the actual performance of the stock market after interest rate cuts entirely depends on the reasons for the cuts. If it is a preventive rate cut similar to that of 1995, the market performs well overall; if it is a fire-fighting rate cut (like during the financial crisis in 2007), the stock market will first decline and then rise, with the process being extremely painful.

If we look further into individual stocks and sector structures, research from Ned Davis Research shows that defensive sectors in the US stock market tend to perform better during each rate cut:

In periods when the economy is relatively strong and the Federal Reserve only implements one to two rate cuts in four cycles of restarting rate cuts, cyclical sectors such as finance and industry perform better than the market.

However, in a period of relative economic weakness, where four or more significant interest rate cuts are needed, investors are more inclined towards defensive sectors. The median return rates for the healthcare and consumer staples sectors are the highest, reaching 20.3% and 19.9%, respectively. In contrast, the technology stocks that everyone is looking forward to only have a pitiful 1.6%.

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In addition, according to research by Nomura Securities, after a 50 basis point interest rate cut, the S&P 500 hardly changed over the following three months, but the small-cap Russell 2000 index averaged a 5.6% increase.

This also makes sense. Small companies are more sensitive to interest rates; their borrowing costs are higher, so the marginal improvement from a rate cut is greater. Moreover, small-cap stocks often represent "risk appetite." When they start to outperform large-cap stocks, it indicates that market sentiment is shifting towards optimism.

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Back to the present, since the interest rate cut in September 2024:

S&P 500: Increased from 5,600 points to 6,500 points (+16%)

Nasdaq: rose from 17,000 points to 22,000 points (+30%)

Compared to historical data, the current annualized increase of 16% has already exceeded the average of 11% after previous Federal Reserve rate cuts. An even more important signal is that the increase in the Nasdaq is almost twice that of the S&P 500. The S&P 500 was already at a historical high before the rate cuts, which is relatively rare in past rate-cutting cycles.

) Bond Market: The Most Stable Yet the Most Boring

Bonds are the most "honest" asset during a rate-cutting cycle. When the Federal Reserve cuts interest rates, bond yields decrease, and bond prices rise, almost without exception.

According to Bondsavvy's analysis, the decline in the yield of the 10-year U.S. Treasury bond during different interest rate cut cycles is quite stable:

2001-2003: Decreased by 129 basis points

2007-2008: A decrease of 170 basis points

2019-2020: Decreased by 261 basis points (during the special period of the pandemic)

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Why was the decline particularly large in 2019-2020? Because the Federal Reserve not only lowered interest rates to zero but also implemented "unlimited QE," which means directly purchasing bonds, artificially lowering yields. Such unconventional operations would not occur in a normal interest rate reduction cycle.

Progress of the Current Period

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Based on experiences from 2001 and 2007, the total decline in the 10-year U.S. Treasury yield should be between 130 and 170 basis points. It has already dropped by 94 basis points, and there may be an additional space of 35 to 75 basis points.

In terms of price conversion, if the 10-year U.S. Treasury yield drops another 50 basis points to around 3.5%, investors holding 10-year Treasury bonds can still achieve a capital gain of about 5%. This is decent for bond investors, but for crypto players who are used to seeing returns double, it may seem relatively low.

However, for investors in risk assets, bonds serve more as a "anchor" for funding costs. If we see a sharp drop in government bond yields while corporate bond yields rise instead of falling, it indicates that the market is seeking safe assets. At this time, the likelihood of risk assets like Bitcoin being sold off is greater.

) Gold: A Steady Winner in the Rate Cut Cycle

Gold may be the asset that understands the Federal Reserve the most. Over the past few decades, gold has not disappointed during almost every rate-cutting cycle.

According to Auronum's research, the performance of gold during the last three interest rate cut cycles:

2001 Interest Rate Cut Cycle: Increased by 31% within 24 months

2007 Interest Rate Cut Cycle: 39% Increase within 24 Months

2019 Interest Rate Cut Cycle: Up 26% within 24 months

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On average, the gold price increased by about 32% in the two years following interest rate cuts. This return rate is not as stimulating as Bitcoin, but it excels in stability. There were positive returns all three times, without exception.

Current Cycle: Outperforming Expectations

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Up 41% in a year, it has already surpassed the performance of any previous rate cut cycle in history during the same period. Why is it so strong?

Firstly, central banks are buying up. In 2024, global central banks purchased over 1,000 tons of gold, setting a historical record. Countries like China, Russia, and India are increasing their holdings. This is because no one wants to keep all their foreign exchange reserves in US dollars, which is referred to as "de-dollarization."

Secondly, geopolitical risks. The Ukraine crisis and conflicts in the Middle East have made certain regions of the world increasingly unstable, and the rise in gold prices increasingly reflects a "war premium."

Third, offsetting inflation expectations. Currently, the U.S. government debt exceeds 120% of GDP, with an annual budget deficit of $2 trillion. Where does this money come from? It can only be printed. Gold is a traditional tool for hedging against currency devaluation. When investors worry about the purchasing power of the dollar, gold rises. This logic applies to Bitcoin as well, but the market still trusts gold more.

Comparison of performance over the past year:

Gold: +41% ($2,580→$3,640)

Bitcoin: +92% ($60,000→$115,000)

On the surface, Bitcoin seems to have the upper hand. However, considering the market capitalization difference, gold is at 15 trillion while Bitcoin is at 2.3 trillion, meaning that a 41% increase in gold actually absorbs a larger amount of funds. Historically, when gold rises more than 35% during a rate-cutting cycle, it usually enters a consolidation phase. The reason is simple — profit-taking needs to be digested.

Final Words

In September 2025, we find ourselves at an interesting point in time.

The interest rate cut cycle has been going on for a year, neither fast nor slow. Bitcoin is at $115,000, neither high nor low. Market sentiment is greedy but not crazy, cautious but not panicked. This intermediate state is the hardest to judge and tests patience the most.

Historical experience tells us that the second half of an interest rate cut cycle is often more exciting. After the last two rate cuts in 1995, the US stock market entered the internet bull market. It was only six months after the interest rate cuts in 2020 that Bitcoin truly took off.

If history rhymes, the next 6-12 months could be a critical window.

But history also tells us that there are always surprises. Perhaps this time the surprise is an explosion of productivity brought by AI, the complete disappearance of inflation, and the Federal Reserve can lower interest rates indefinitely. Or the surprise is an escalation of geopolitical conflicts, or a new financial crisis.

The only change we can be sure of is the change itself.

The dollar-dominated monetary system is changing, the way value is stored is changing, and the speed of wealth transfer is changing.

Cryptocurrency represents not just an investment category, but a small reflection of this changing era. So, instead of getting caught up in whether Bitcoin will rise to 150,000 or 200,000, it’s better to ask yourself:

Am I ready in this changing context?

If your answer is yes, then congratulations. The interest rate cut cycle has just begun, and the real show is yet to come.

Source: Deep Tide TechFlow