On Monday, Bitcoin traded just shy of its month-long high, extending last week's gains in crypto and risk assets, including stocks, following the U.S. Federal Reserve’s rate hike decision.

The Fed lowered its benchmark interest rate by 50 basis points on Wednesday, exceeding economists' expectations of a quarter of a percentage point cut. It also marked the first time that the central bank had slashed the rate in four years.

Crypto analysts have embraced the move as a positive catalyst for market activity, especially since Bitcoin, a key market indicator, has yet to reclaim its March all-time high of over $73,800 this year.

“Given that crypto is fundamentally a risk-on asset class, in our view, the shift to a regime of lowering interest rates represents a significant bullish catalyst,” Matthew Graham, managing partner at Ryze Labs, said. “For the last several years, crypto prices, including Bitcoin, have been influenced by international macroeconomic conditions more than any other single factor.” 

By adjusting the federal funds rate, the Fed aims to manage inflation, promote employment, and maintain economic stability. The central bank is hoping to walk the fine line between overstimulating the economy, leading to another cycle of high inflation, and missing the mark by failing to cut rates aggressively.

While the U.S. Fed has initiated its cutting cycle, the Bank of Japan on Friday voted to leave interest rates unchanged. At the same time, the Bank of England has announced a pause to its rate cut regime, opting instead for a “gradual approach” following its first rate cut in August.

Central bank interest rate decisions influence liquidity and investor behavior, impacting how much capital flows into speculative assets like cryptocurrencies. Divergent policies, such as the Fed cutting rates while other banks hold or pause, create uncertainty that can cause crypto market volatility or pauses in price growth.

With much of the rate cut-related euphoria and speculation now in the rearview, crypto prices may take a “breather,” QCP Capital wrote in a short investor note on late Friday evening.

The Singapore-based digital asset trading firm interpreted a recent dip in volatility for Bitcoin’s options contracts as the market’s response to the ongoing path “toward policy normalization.”

A dip in volatility typically reflects less extreme price swings and suggests that traders are not expecting dramatic near-term changes.

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