Cryptocurrency analytics firm Alphractal has published an in-depth assessment of Bitcoin (BTC) and broader market trends, shedding light on the relationship between interest rates, the S&P 500, and digital assets.
The latest report, titled “Interest Rates, the S&P 500, and Bitcoin: Lessons from the Past and Expectations in 2025,” examines historical market reactions to the Fed’s policy changes and offers important insights for investors navigating the current economic environment.
- Dot-Com Bubble (2000-2002): Fed rate hikes contributed to the bursting of the tech bubble, causing the S&P 500 to fall by nearly 50% as overvalued companies collapsed.
- Subprime Crisis (2007-2009): The S&P 500 fell nearly 57% as the Fed raised interest rates to combat inflation and excessive credit, triggering a global financial crisis.
COVID-19 Crash and Recovery (2020): The Fed’s emergency rate cuts and liquidity injections initially led to a sharp 35% decline in the S&P 500, followed by a rapid recovery. Bitcoin has been volatile, but has ultimately benefited from the low-interest environment, strengthening its appeal as an alternative asset.
Current Cycle (2022-2025): Divergence in Market Behavior
Since 2022, the Fed has aggressively raised interest rates from near-zero to 5.5% to counter post-pandemic inflation. Unlike previous crises, the S&P 500 has remained resilient, reaching new highs in 2024-2025. Alphractal attributes this to the following reasons:
- Lower corporate leverage compared to 2008.
- Strong performance from AI and technology giants like NVIDIA and Microsoft.
- Expectations of gradual interest rate cuts are fueling investor optimism.
However, the divergence between interest rates and stock market performance is a major concern, according to the analyst firm. Historically, such a breakout has been preceded by high volatility.
Bitcoin's historical performance reveals a strong correlation with liquidity conditions:
- 2010-2021 (Low Interest Rate Era): Bitcoin rose from mere cents to $69,000 in 2021.
- 2022 Rate Hikes: BTC experienced a sharp correction and dropped to around $16,000.
- 2024-2025 Stabilization: Bitcoin has regained strength as interest rates have fallen slightly, consolidating its role as a hedge against expansionary monetary policy and inflation.
What Happens to Bitcoin If the Fed Cuts Interest Rates?
According to Alphractal, the impact of future rate cuts will depend on their nature:
- Emergency Cuts (Symptom of Crisis): If the Fed is forced to cut rates due to a major economic shock (similar to 2008 or 2020), initial market reactions may be bearish, with both the S&P 500 and Bitcoin experiencing sharp declines.
- Preemptive Cuts (Soft Landing): Gradual interest rate cuts, as seen in 1995-1996 and 2019, can support market growth, benefiting both stocks and digital assets.
Market Scenarios 2025: Alphractal's Forecasts
Alphractal outlines three possible scenarios for 2025:
- Gradual Rate Cuts: If the Fed cuts interest rates in a controlled manner without triggering a recession, the S&P 500 could maintain its upward momentum and Bitcoin could benefit from increased liquidity.
- External Shock: A new crisis such as geopolitical instability, banking collapse or another pandemic could cause a sharp decline in the market despite interest rate cuts.
- Persistently High Interest Rates: If inflation remains stubborn and the Fed maintains or raises interest rates, a severe market correction similar to 2000 or 2008 could ensue.
*This is not investment advice.
