Bitcoin’s 300% Surge From Early 2019 in Focus as Fed Officials Favor Rate Pause

They say history doesn't always repeat itself, but in financial markets it often rhymes.

The recent dovish rumblings by U.S. Federal Reserve (Fed) officials have revived memories from early 2019 when bitcoin (BTC) surged over 300% against a similar Fed backdrop.

Since early 2022, the Fed has raised interest rates by 525 basis points to tame inflation. The so-called liquidity tightening cycle has been one of the major sources of pain for risk assets, including bitcoin.

This week, the Fed policymakers have offered a dovish respite. On Tuesday, Atlanta Fed Bank President Raphael Bostic and Minneapolis Fed President Neel Kashkari said the central bank may not need to raise rates further. Dallas Fed President Lorie Logan and Fed Governor Christopher Waller argued that rising Treasury yields have done the Fed's job, preventing any urgent need for another rate hike, according to Reuters.

These comments have strengthened the belief in the market that the central bank's dreaded tightening cycle ended with July's 25 basis point rate and that the bank will now wait to see how the macroeconomic situation unfolds in the coming months.

The Fed's previous rate cycle, which ran for three years, saw rates peak at 2.5% in December 2018, following which the central bank adopted a wait-and-watch mode for seven months. Bitcoin bottomed out in December 2018 and rose to $13,880 by the end of June 2019.

Another interesting parallel is that the latest pause in the Fed tightening cycle comes several months ahead of the supposedly-bullish Bitcoin blockchain's mining reward halving, just as it did four years ago.

"Reflecting back on 2019, the Fed concluded its rate-hiking cycle and entered a seven-month pause. During this period, Bitcoin experienced a dramatic price rally, surging by an impressive 325%," Markus Thielen, head of research and strategy, said in a note to clients last week. "In line with our outlook, it’s highly likely that the Fed concluded its rate-hiking cycle in July 2023."

"At present, the most critical macroeconomic factor appears to be a reflection of the situation in 2019 when the Fed paused its rake hikes, leading to a significant surge in bitcoin prices," Thielen added.

In other words, assuming all else is equal, past data favors an upside in bitcoin. The leading cryptocurrency by market value changed hands at $26,800 at press time, representing a 62% year-to-date gain, according to CoinDesk data.

While the 2019 playbook favours upside in bitcoin, an eventual Fed pivot to rate cuts might initially lead to price weakness.

Per Thielen, traders should closely follow the rationale behind potential Fed rate cuts. Rate cuts implemented to counter economic weakness and low inflation might have bearish implications, Thielen noted.