Cryptocurrencies, led by Bitcoin, could see a strong rally as central banks, particularly the US Federal Reserve, prepare to ease monetary policy, market analysts say.
The anticipated rate cuts are expected to inject fresh liquidity into financial markets, boosting risk assets like stocks and cryptocurrencies despite current market uncertainties.
Analysts are nonetheless advising traders to take a measured approach in the face of the US presidential election in November and ongoing uncertainties over fiscal policy. However, the overall sentiment points to a cautiously optimistic outlook for the cryptocurrency market as central banks around the world move toward easing, analysts said.
That’s good news for market watchers who saw blue-chip cryptocurrencies trade lower Tuesday night, as liquidations of positions betting on higher prices climbed above $170 million.
Flagship cryptocurrency Bitcoin is down about 6% from its Tuesday drop to $59,200, according to data from CoinGecko.
On Tuesday, QCP Capital noted that any declines in stocks and cryptocurrencies would likely be “short-lived” as the Fed prepares to kick off a rate-cutting cycle.
Last week, U.S. Federal Reserve Chairman Jerome Powell suggested the central bank could start cutting interest rates as early as next month, with the market pricing in three rate cuts this year.
“Increasing liquidity will eventually push risk assets higher,” the Singapore-based digital asset trading firm wrote in a press release. note“We are finally on the cusp of a rate-cutting cycle.”
This sentiment is echoed by analysts at blockchain analytics platform Nansen, who have highlighted the potential for a continued bullish trend in the cryptocurrency market, supported by what they describe as the “Fed put.”
The term refers to the belief that the Federal Reserve will intervene to support the economy and financial markets, particularly as inflation slows and growth stabilizes.
“The bullish regime in cryptocurrencies has not yet been challenged,” Nansen said in a report Tuesday, adding that “the most bullish driver is the ‘Fed put’ which is occurring in the context of weaker but not recessionary growth.”
Despite this optimistic outlook, Nansen warned that high stock market valuations could pose a risk to the cryptocurrency market, creating what they describe as a “downside asymmetry” for risk assets.
In simple terms, this means that even though the cryptocurrency market looks positive, there is concern that stocks are currently priced too high. If stock prices fall, it could negatively impact the cryptocurrency market more than it could benefit.
However, the report suggests that current economic conditions still favor a measured approach for investors, advising them to “reduce allocation to cryptocurrencies during rallies and focus on the majors,” which include Bitcoin and Ethereum.
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