If the Federal Reserve cuts interest rates, which asset will come out on top: Bitcoin, Gold, or US Stocks?

Original Article Title: "Retrospect of the Federal Reserve Interest Rate Cut Cycle, Where Will Bitcoin, Stock Market, and Gold Go?"

Original Article Author: David, Deep Tide TechFlow

"Let's take a break first and wait to act after the Federal Reserve decision," these days, the investment community is filled with a wait-and-see sentiment.

At 2:00 am on September 18th, 东八区, the Federal Reserve will announce its latest interest rate decision. Since the interest rate cut in September last year, this is the 5th rate-setting meeting. The market is expected to cut rates by another 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 rate cut cycle. Now, we are already halfway through the rate cut.

Why is everyone waiting for this shoe to drop? Because history tells us that after the Federal Reserve enters the rate cut path, various types of assets often usher in a round of soaring trends.

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

Retrospecting the past 30 years of Federal Reserve rate cuts, perhaps we can find answers from historical data.

Which type of rate cut cycle are we at the starting point of?

Historically, Federal Reserve rate cuts have never been a simple action.

Sometimes, rate cuts are an economic booster shot, and the market responds with a strong rally; but sometimes, rate cuts are a prelude to a storm, indicating that a larger crisis is imminent, and asset prices may not necessarily rise in response.

1995, Preemptive Rate Cut.

Then Federal Reserve Chairman Greenspan faced a "happy dilemma": strong economic growth but signs of overheating. So he chose a "preemptive rate cut," lowering the rate from 6% to 5.25%, a total cut of only 75 basis points.

And the result? The U.S. stock market embarked on its most brilliant 5-year bull market of the Internet era, with the Nasdaq index rising fivefold over the next 5 years. A textbook soft landing.

2007, Crisis Relief Rate Cut.

Just as depicted in the movie "The Big Short," the trend of the subprime mortgage crisis was already emerging, but few people realized the scale of the storm. In September of that year, when the Federal Reserve started cutting rates from 5.25%, the market was still in a frenzy, and the S&P 500 had just hit a historical high.

But as we all know from the subsequent script: Lehman Brothers collapsed, triggering a global financial tsunami. The Federal Reserve had to reduce the interest rate from 5.25% to 0.25% within 15 months, a 500 basis point cut. This belated rescue was still unable to prevent the economy from falling into the most severe recession since the Great Depression.

2020, Panic-Driven Rate Cuts.

No one could have predicted the "Black Swan" event of the COVID-19 pandemic. On March 3rd and March 15th, the Federal Reserve made two emergency rate cuts, reducing the rate from 1.75% to 0.25% within 10 days. They also initiated "unlimited quantitative easing," expanding the balance sheet from $4 trillion to $9 trillion.

This unprecedented flood of liquidity led to one of the most magical moments in financial history: the real economy came to a standstill, while financial assets were in a frenzy. Bitcoin surged from $3,800 in March 2020 to $69,000 in November 2021, a growth of over 17 times.

Reflecting on these three rate-cutting modes, you can also see three similar outcomes with different asset changes along the way:

· Prophylactic Rate Cut: Small rate cut, soft economic landing, steady asset growth

· Crisis Relief Rate Cut: Large rate cut, hard economic landing, assets initially fall and then rise

· Panic-Driven Rate Cut: Emergency rate cut, extreme volatility, assets V-shaped reversal

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

From a data perspective, the current situation resembles more of a prophylactic rate cut in 1995. The unemployment rate is 4.1%, not high; GDP is still growing, not in a recession; and inflation has fallen from its peak of 9% in 2022 to around 3%.

But there are also several unsettling details worth noting:

Firstly, this rate cut comes when the stock market is already at historic highs, with the S&P 500 having risen over 20% this year.

Historically, in 1995, the rate cut came as the stock market was just recovering from a low point; while in 2007, the rate cut came at a high point, followed by a crash. Secondly, the U.S. government debt-to-GDP ratio has reached 123%, far exceeding the 64% in 2007, which also limits the government's fiscal stimulus capacity.

But no matter which rate cut mode, one thing is certain: the liquidity floodgates are about to open.

The Rate Cut Playbook for the Crypto Market

This time, when the Fed once again turns on the tap, what will happen to the crypto market?

To answer this question, we first need to understand what the crypto market went through in the previous rate cut cycle.

From 2019 to 2020, when a market with a market cap of only $200 billion suddenly welcomed trillions in liquidity, the entire asset appreciation process was not immediate.

· 2019 Rate Cut Cycle: Thunder without Rain

On July 31 of that year, the Fed cut rates for the first time in ten years. This should have been a major boon for the crypto market at the time.

Interestingly, Bitcoin seemed to have received the news in advance. By the end of June, Bitcoin started rising from $9,000 and had reached $13,000 by mid-July. The market was betting that the rate cut would bring about a new bull run.

However, after the rate cut actually arrived, the trend was unexpected. On the rate cut day, July 31, Bitcoin oscillated around $12,000 and then fell instead of rose. By August, it dropped below $10,000, and by December, it had fallen back to around $7,000.

Why did this happen? Looking back, there could be several reasons.

First, the 75 basis points rate cut was relatively mild, and the release of liquidity was limited. Second, the crypto market had just emerged from the bear market of 2018, and investor confidence was low.

Most importantly, traditional institutions were still on the sidelines, and the funds from this rate cut mainly flowed into the stock market, where the S&P 500 rose by nearly 10% during the same period.

· 2020 Rate Cut Cycle: The Super Roller Coaster after the 3/12 Massacre

In the first week of March, the market already smelled the scent of crisis. On March 3, the Fed hastily cut rates by 50 basis points. Bitcoin not only did not rise but instead fell from $8,800 to $8,400. The market's logic was: emergency rate cut = big economic problems = better run for cover.

The following week was the darkest moment in the crypto market. On March 12, Bitcoin plummeted from $8,000 to $3,800, with a single-day drop of over 50%. Ethereum fared even worse, falling from $240 to $90.

The classic "312" crash has become a collective traumatic memory for the crypto market.

This day's plunge was actually part of a global liquidity crisis. Amid pandemic panic, all assets were being sold off—stock market circuit breakers, gold price drop, U.S. bonds falling. Investors were frantically liquidating everything for cash, even "digital gold" like Bitcoin couldn't escape.

What's even more deadly was that the crypto market's high leverage magnified the decline. On derivative exchanges like BitMEX, a large number of 100x leveraged long positions were liquidated, triggering a cascade of liquidations like an avalanche. Within a few hours, the total amount liquidated across the market exceeded $3 billion.

But just when everyone thought it was game over, a turnaround occurred.

On March 15, the Fed announced a rate cut to 0-0.25% and launched a $700 billion quantitative easing (QE) program. On March 23, the Fed even unleashed the "unlimited QE" move. After bottoming out at $3,800, Bitcoin began an epic rebound:

· March 13, 2020: $3,800 (low point)

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

· October 2020: $13,000 (240% increase in 7 months)

· December 2020: $29,000 (660% increase in 9 months)

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

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

It wasn't just Bitcoin, the entire crypto market was in a frenzy. Ethereum surged from $90 to $4,800, a 53x increase. Many DeFi tokens saw gains of over a hundredfold. The total crypto market capitalization expanded from $150 billion in March 2020 to $30 trillion in November 2021.

Comparing to 2019 and 2020, both experiencing rate cuts, why was the market reaction so drastically different?

In hindsight, the answer is very simple: The magnitude of the rate cut determines the scale of the influx of funds.

In 2020, going straight to zero rates, coupled with unlimited QE, was like opening the floodgates. The Fed's balance sheet expanded from $4 trillion to $9 trillion, injecting a sudden additional $5 trillion in liquidity into the market.

Even if only 1% flows into the crypto market, that's still $500 billion. This is equivalent to one-third of the entire crypto market's total market cap at the beginning of 2020.

Furthermore, players in 2020 also experienced a shift in mentality from extreme panic to extreme greed. In March, everyone was selling off all assets for cash; by the end of the year, everyone was taking out loans to buy assets. This extreme swing in sentiment magnified price fluctuations.

More importantly, institutions have also entered the scene.

MicroStrategy began purchasing Bitcoin in August 2020, accumulating over 100,000 coins. Tesla announced in February 2021 that it had purchased $1.5 billion worth of Bitcoin. Grayscale Bitcoin Trust's (GBTC) holdings grew from 200,000 coins at the beginning of 2020 to 650,000 coins by the end of the year.

The entrance of these institutions not only brought substantial investments but more importantly, it brought an endorsement effect.

· 2025, History Repeating Itself?

In terms of the rate cut magnitude, the market expected a 25-basis-point cut on September 17, and this is just the beginning. If we extrapolate based on the current economic data, the entire rate-cutting cycle (over the next 12-18 months) may accumulate cuts of 100-150 basis points, ultimately bringing the rate down to around 3.0-3.5%. This range falls between the cuts of 75 basis points in 2019 and cutting to zero in 2020.

Regarding the market position, Bitcoin is already near its historical high around $115,000, with not as much significant upside potential as in March 2020. However, on the other hand, it is not like 2019 when it had just emerged from a bear market; market confidence is relatively high.

In terms of institutional participation, the approval of a Bitcoin ETF is a watershed moment. In 2020, institutions were tentatively buying in; now, there are standardized investment tools. However, institutions have also become smarter and will not FOMO buy high as they did in 2020-2021.

Perhaps in 2024-2025, we will see a third scenario, neither the calm of 2019 nor the frenzy of 2020, but a kind of "rational prosperity." Bitcoin may not see another 17x surge, but with the liquidity floodgates open, a stable rise is a more convincing logic.

It is also crucial to observe the performance of other assets. If the stock market and gold are both rising, funds will flow elsewhere.

Performance of Traditional Assets in a Rate-Cutting Cycle

A rate-cutting cycle not only affects the crypto market, but the performance of traditional assets is also worth noting.

For crypto investors, understanding the historical performance patterns of these assets is crucial because they are not only a source of funds but also competitors.

US Stocks: Not All Rate Cuts Lead to a Bull Market

According to BMO's research data, we can see the detailed performance of the S&P 500 during rate-cutting cycles over the past 40+ years:

History shows that the S&P 500 Index tends to have positive returns in the 12 to 24 months following the first or renewed rate cut by the Federal Reserve.

Interestingly, if we exclude the two "black swan" events of the tech bubble (2001) and the financial crisis (2007) from the table above, the average returns of the S&P 500 before and after rate cuts would be higher.

This precisely demonstrates that the average return of the S&P 500 is just a reference point, and the actual performance of the stock market after a rate cut depends entirely on the reason for the cut. If it is a preventive cut like in 1995, the market generally reacts positively. If it is an emergency cut (e.g., during the 2007 financial crisis), the stock market first declines and then rises, making the process extremely painful.

Furthermore, looking at individual stocks and sector structure, Ned Davis Research's study indicates that defensive sectors within the US stock market perform better during rate-cutting cycles:

1. In four cycles where the economy was relatively strong and the Federal Reserve only implemented one or two rate cuts, cyclical sectors like finance and industrials outperformed the broader market.

2. However, in periods of relatively weak economic conditions requiring four or more significant rate cuts, investors tend to favor defensive sectors where the median return rates of the healthcare and consumer staples sectors are highest at 20.3% and 19.9%, respectively. The tech sector, which is usually anticipated, only achieves a meager 1.6%.

Additionally, according to Nomura Securities' research, three months after a 50 basis point rate cut, the S&P 500 remained relatively unchanged, while the small-cap Russell 2000 Index increased by an average of 5.6%.

This also makes sense. Small companies are more sensitive to interest rates, with higher loan costs, so the marginal improvement from a rate cut is greater. Additionally, small-cap stocks often represent "risk preference," so when they start outperforming large-cap stocks, it indicates a shift in market sentiment towards optimism.

Looking back to now, since the interest rate cut in September 2024:

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

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

Comparing historical data, the current 16% annualized growth has already exceeded the 11% average after previous Fed rate cuts. More importantly, the Nasdaq's increase is almost twice that of the S&P 500. The S&P 500 was already at a historical high before the rate cut, which is relatively rare in past rate cut cycles.

Bond Market: Most Stable Yet Most Boring

Bonds are the most "honest" asset during a rate cut cycle. When the Fed cuts rates, bond yields fall, bond prices rise, with almost no surprises.

According to Bondsavvy's analysis, the decline in the yield of the 10-year U.S. Treasury bond has been fairly stable across different rate cut cycles:

· 2001-2003: decreased by 129 basis points

· 2007-2008: decreased by 170 basis points

· 2019-2020: decreased by 261 basis points (during the unique pandemic period)

Why was the decline particularly large in 2019-2020? Because the Fed not only cut rates to zero but also did "unlimited QE," essentially buying bonds on a massive scale, artificially lowering yields. This type of unconventional operation is not seen in a typical rate cut cycle.

Progress of the Current Cycle

Following the experiences of 2001 and 2007, the total decline in the 10-year U.S. Treasury bond yield should be between 130-170 basis points. It has already fallen by 94 basis points, potentially leaving another 35-75 basis points of room to fall.

In terms of price, if the yield on the 10-year U.S. Treasury bond falls another 50 basis points to around 3.5%, investors holding these bonds could see approximately a 5% capital gain. This is good news for bond investors, but for cryptocurrency players accustomed to frequent doubling of their investments, the returns may seem lower.

However, for risk asset investors, bonds serve more as a "anchor" for capital cost. If you see a sharp drop in government bond yields while corporate bond yields rise, it indicates the market is seeking safe assets. At this time, the likelihood of selling off risk assets like Bitcoin is higher.

Gold: The Stable Winner in Rate Cut Cycles

Gold may be the asset that best "understands" the Fed. Over the past few decades, almost every rate cut cycle has not disappointed gold investors.

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

· 2001 Rate Cut Cycle: Up 31% in 24 months

· 2007 Rate Cut Cycle: Up 39% in 24 months

· 2019 Rate Cut Cycle: Up 26% in 24 months

On average, gold has shown a 32% increase in the two years following a rate cut. This rate of return may not be as exciting as Bitcoin's, but it excels in stability. Each time has resulted in positive returns with no exceptions.

· Current Cycle: Exceptional Performance

It has risen by 41% in a year, surpassing the performance of any previous rate cut cycle in history. Why is it so strong?

First, central bank buying. In 2024, global central banks bought over 1,000 tons of gold, setting a historical record. Countries like China, Russia, and India have increased their holdings. This is because no one wants to keep all their foreign exchange reserves in US dollars, a trend known as "de-dollarization."

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

Third, offsetting inflation expectations. The current US government debt exceeds 120% of GDP, with an annual fiscal deficit of $2 trillion. Where does this money come from? Printing more. Gold is a traditional hedge against currency devaluation. When investors are concerned about the purchasing power of the US dollar, gold rises. This logic applies to Bitcoin as well, but the market still has more trust in gold.

Performance over the past year:

· Gold: +41% ($2,580→$3,640)

· Bitcoin: +92% ($60,000→$115,000)

On the surface, Bitcoin appears to have the upper hand. However, considering the difference in market capitalization, with gold at $15 trillion and Bitcoin at $2.3 trillion, the 41% increase in gold has actually absorbed a larger amount of funds. But historically, when gold has seen an increase of over 35% in a rate-cutting cycle, it usually enters a consolidation phase. The reason is simple—profit-taking needs to be digested.

In Conclusion

September 2025, we find ourselves at an interesting juncture.

One year into the rate-cutting cycle. Bitcoin at $115,000, neither too high nor too low. Market sentiment is greedy but not crazy, cautious but not panicked. This state of equilibrium is the most difficult to judge and tests patience the most.

Historical experience tells us that the latter half of the rate-cutting cycle is often more exciting. After the last two rate cuts in 1995, the U.S. stock market kicked off the dot-com bull run. Half a year after the rate cut in 2020, 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 will be AI ushering in a productivity boom, inflation disappearing entirely, and the Fed being able to cut rates limitlessly. Maybe the surprise will be an escalation of geopolitical conflicts, or a new financial crisis.

The only constant is change itself.

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

Crypto represents not just an asset class but a tiny microcosm of this era of change. So, instead of debating whether Bitcoin will rise to $150,000 or $200,000, ask yourself:

In the backdrop of this change, am I ready?

If your answer is yes, then congratulations. The rate-cutting cycle is just beginning; the real show is yet to come.