If the Federal Reserve starts cutting interest rates, which will outperform: Bitcoin, gold, or U.S. stocks?

Original Title: "Reviewing the Fed's Rate Cut Cycle: Where Will Bitcoin, the Stock Market, and Gold Go?"

Original Author: David, Deep Tide TechFlow

"Take a break and wait for the Fed's decision before making moves"—in recent days, a wait-and-see sentiment has been prevalent in investment communities.

At 2 a.m. on September 18, East 8th time zone, the Federal Reserve will announce its latest interest rate decision. Since the rate cut last September, this will be the fifth FOMC meeting. The market expects another 25 basis point cut, from the current 4.5% down to 4.25%.

A year ago, everyone was waiting for the start of the rate cut cycle. Now, we are already halfway through it.

Why is everyone waiting for this shoe to drop? Because history tells us that once the Fed enters a rate-cutting channel, various assets often experience a take-off rally.

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

By reviewing the Fed's rate cut cycles over the past 30 years, perhaps we can find answers from historical data.

What Kind of Rate Cut Cycle Are We Standing At the Beginning Of?

Historically, a Fed rate cut has never been a simple move.

Sometimes, a rate cut is a shot in the arm for the economy, and the market surges in response; but sometimes, a rate cut is actually the prelude to a storm, signaling a bigger crisis ahead, and asset prices may not rise as expected.

1995: Preventive Rate Cut.

At that time, Fed Chairman Greenspan faced a "happy dilemma": the economy was growing steadily, but signs of overheating appeared. So he chose a "preventive rate cut," lowering rates from 6% to 5.25%, a total cut of just 75 basis points.

The result? The U.S. stock market kicked off the most glorious five-year bull market of the Internet era, with the Nasdaq rising fivefold in the next five years. It was a textbook soft landing.

2007: Bailout Rate Cut.

As depicted in the movie "The Big Short," the subprime crisis was already brewing, but few realized the scale of the coming storm. In September that year, when the Fed started cutting rates from 5.25%, the market was still partying, and the S&P 500 had just hit a record high.

But we all know what happened next: Lehman Brothers collapsed, a global financial tsunami ensued, and the Fed had to slash rates from 5.25% to 0.25% in 15 months—a 500 basis point cut. This rescue came too late and failed to prevent the worst recession since the Great Depression.

2020: Panic Rate Cut.

No one could have predicted the "black swan" of COVID-19. On March 3 and March 15, the Fed made two emergency rate cuts, slashing rates from 1.75% to 0.25% in just 10 days. At the same time, it launched "unlimited quantitative easing," expanding its balance sheet from $4 trillion to $9 trillion.

This unprecedented liquidity injection created one of the most surreal moments in financial history: while the real economy was shut down, financial assets were partying. Bitcoin soared from $3,800 in March 2020 to $69,000 in November 2021, a gain of over 17 times.

Looking back at these three rate cut models, you can see three similar results, but with different asset movement processes:

· Preventive Rate Cut: Small rate cut, economic soft landing, assets rise steadily

· Bailout Rate Cut: Large rate cut, economic hard landing, assets fall first then rise

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

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

From the data, it now looks more like the preventive rate cut of 1995. The unemployment rate is 4.1%, not high; GDP is still growing, no recession; inflation has fallen from the 9% peak in 2022 to around 3%.

But there are a few unsettling details worth noting:

First, this time the rate cut comes when the stock market is already at historic highs, with the S&P 500 up more than 20% this year.

Historically, in 1995, the rate cut came just as the stock market was recovering from a low; in 2007, the rate cut came at a high, and the market crashed soon after. Secondly, the U.S. government debt-to-GDP ratio has reached 123%, far exceeding the 64% of 2007, which also limits the room for fiscal stimulus.

But regardless of the rate cut model, one thing is certain: the floodgates of liquidity are about to open.

The Rate Cut Script for the Crypto Market

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

To answer this, we first need to understand what the crypto market experienced during the last rate cut cycle.

From 2019 to 2020, when a market with a capitalization of only $200 billion suddenly received a trillion-dollar liquidity injection, the asset appreciation process was not instantaneous.

· 2019 Rate Cut Cycle: Much Thunder, Little Rain

On July 31 that year, the Fed cut rates for the first time in a decade. For the crypto market at the time, this should have been a major positive.

Interestingly, Bitcoin seemed to get the news early. At the end of June, Bitcoin started rising from $9,000 and had already touched $13,000 by mid-July. The market was betting that the rate cut would bring a new bull run.

But when the rate cut actually came, the trend was surprising. On the day of the rate cut, July 31, Bitcoin fluctuated around $12,000, then fell instead of rising. In August, it broke below $10,000, and by December, it had fallen back to around $7,000.

Why did this happen? In retrospect, there may be several reasons.

First, the 75 basis point rate cut was relatively mild, with limited liquidity released. Second, the crypto market had just emerged from the 2018 bear market, and investor confidence was lacking.

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

· 2020 Rate Cut Cycle: The Super Roller Coaster After the 3/12 Crash

In the first week of March, the market already smelled crisis. On March 3, the Fed made an emergency 50 basis point rate cut, but Bitcoin didn't rise; instead, it fell from $8,800 to $8,400. The market logic was: emergency rate cut = big economic problem = better run first.

The following week was the darkest moment for the crypto market. On March 12, Bitcoin crashed from $8,000 to $3,800, a drop of over 50% in 24 hours. Ethereum fared even worse, falling from $240 to $90.

The classic "3/12" crash became a collective trauma for the crypto market.

This day's plunge was actually part of a global liquidity crisis. Amid pandemic panic, all assets were being sold—stock market circuit breakers, gold falling, even U.S. Treasuries dropping. Investors frantically sold everything for cash, and even "digital gold" Bitcoin was not spared.

Worse, high leverage in the crypto market amplified the drop. On derivatives exchanges like BitMEX, a large number of 100x leveraged long positions were liquidated, triggering a chain reaction like an avalanche. In just a few hours, total liquidations across the network exceeded $3 billion.

But just when everyone thought it was going to zero, the turning point arrived.

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

· March 13, 2020: $3,800 (low point)

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

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

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

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

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

It wasn't just Bitcoin— the entire crypto market was in a frenzy. Ethereum soared from $90 to a peak of $4,800, a 53-fold increase. Many DeFi tokens rose by hundreds of times. The total crypto market cap ballooned from $150 billion in March 2020 to $3 trillion in November 2021.

Comparing 2019 and 2020, why did the market react so differently to the same rate cut?

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

In 2020, rates were cut directly to zero, plus unlimited QE, which was like opening the floodgates. The Fed's balance sheet expanded from $4 trillion to $9 trillion, injecting $5 trillion in liquidity into the market.

Even if only 1% flowed into the crypto market, that's $50 billion. That's equivalent to one-third of the entire crypto market cap at the start of 2020.

In addition, players in 2020 experienced a shift from extreme panic to extreme greed. In March, everyone was selling all assets for cash; by the end of the year, everyone was borrowing money to buy assets. This emotional volatility amplified price swings.

More importantly, institutions entered the market.

MicroStrategy began buying Bitcoin in August 2020, accumulating over 100,000 coins. Tesla announced a $1.5 billion Bitcoin purchase in February 2021. Grayscale Bitcoin Trust (GBTC) holdings grew from 200,000 coins at the start of 2020 to 650,000 by year-end.

These institutional buys not only brought real money, but more importantly, brought endorsement effects.

· 2025, History Repeats?

In terms of rate cut magnitude, the market expects a 25 basis point cut on September 17, which is just the beginning. If we extrapolate from current economic data, the entire rate cut cycle (next 12-18 months) may see a cumulative cut of 100-150 basis points, with the final rate dropping to around 3.0-3.5%. This is between the 75 basis points of 2019 and the zero rate of 2020.

From a market position perspective, Bitcoin is already near its historical high of $115,000, unlike March 2020 when there was huge upside potential. On the other hand, it's also not like 2019, just emerging from a bear market, so market confidence is relatively sufficient.

From an institutional participation perspective, the approval of Bitcoin ETFs is a watershed. In 2020, institutions were making tentative buys; now, there are standardized investment tools. But institutions have also gotten smarter and won't FOMO chase highs like in 2020-2021.

Perhaps, in 2024-2025, we'll see a third script—neither the dullness of 2019 nor the madness of 2020, but a kind of "rational prosperity." Bitcoin may not see another 17-fold increase, but with the liquidity gates opening, a steady rise is a more convincing logic.

The key also depends on the performance of other assets. If stocks and gold are also rising, capital will be diverted.

Performance of Traditional Assets During Rate Cut Cycles

The rate cut cycle not only affects the crypto market; the performance of traditional assets is equally worth watching.

For crypto investors, understanding the historical performance patterns of these assets is crucial, as they are both sources of funds and competitors.

U.S. Stocks: Not Every Rate Cut Brings a Bull Market

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

History shows that the S&P 500 usually delivers positive returns within 12 to 24 months after the Fed's first or renewed rate cut.

Interestingly, if we exclude the tech bubble (2001) and the financial crisis (2007)—the two "black swans"—the average return of the S&P 500 before and after rate cuts would be even higher.

This precisely illustrates the point: the S&P 500's average return is just a reference; the actual stock market performance after a rate cut depends entirely on the reason for the cut. If it's a preventive cut like 1995, the market is happy; if it's a firefighting cut (like the 2007 financial crisis), the stock market falls first then rises, and the process is extremely painful.

Looking further at individual stocks and sector structure, Ned Davis Research shows that defensive sectors in the U.S. stock market perform better during rate cuts:

1. In four cycles where the economy was relatively strong and the Fed only implemented one or two rate cuts, cyclical sectors such as financials and industrials outperformed the broader market.

2. But in cycles where the economy was weak and four or more large rate cuts were needed, investors preferred defensive sectors, with healthcare and consumer staples delivering the highest median returns at 20.3% and 19.9%, respectively. Meanwhile, the much-anticipated tech sector only managed a meager 1.6%.

In addition, according to Nomura Securities research, in the three months after a 50 basis point rate cut, the S&P 500 barely changed, but the small-cap Russell 2000 index rose an average of 5.6%.

This also makes sense. Small companies are more sensitive to interest rates, as their borrowing costs are higher and the marginal improvement from rate cuts is greater. Moreover, small-cap stocks often represent "risk appetite"—when they start outperforming the broader market, it signals a shift toward optimism in market sentiment.

Back to the present, since the September 2024 rate cut:

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

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

Compared to historical data, the current 16% annualized gain already exceeds the 11% average after previous Fed rate cuts. More importantly, the Nasdaq's gain is nearly double that of the S&P 500. The S&P 500 was already at historic highs before the rate cut, which is rare in past cycles.

Bond Market: The Steadiest but Also the Most Boring

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

According to Bondsavvy's analysis, the decline in 10-year U.S. Treasury yields during different rate cut cycles is quite stable:

· 2001-2003: Down 129 basis points

· 2007-2008: Down 170 basis points

· 2019-2020: Down 261 basis points (special pandemic period)

Why was the drop in 2019-2020 especially large? Because the Fed not only cut rates to zero but also launched "unlimited QE," directly buying bonds and artificially suppressing yields. Such unconventional operations don't occur in normal rate cut cycles.

Current Cycle Progress

Based on the experience of 2001 and 2007, the total decline in 10-year Treasury yields should be between 130-170 basis points. So far, they've dropped 94 basis points, leaving 35-75 basis points of room.

In terms of price, if the 10-year Treasury yield falls another 50 basis points to around 3.5%, investors holding 10-year Treasuries could gain about 5% in capital gains. That's decent for bond investors, but for crypto players used to doubling returns, it may seem low.

However, for risk asset investors, bonds serve more as a "benchmark" for funding costs. If Treasury yields plummet while corporate bond yields rise, it means the market is seeking safe assets. At that point, risk assets like Bitcoin are more likely to be sold off.

Gold: The Stable Winner in Rate Cut Cycles

Gold may be the asset that "understands" the Fed best. Over the past decades, almost every rate cut cycle has seen gold deliver.

According to Auronum's research, gold's performance during 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 rose about 32% in the two years after a rate cut. This return isn't as exciting as Bitcoin, but it's stable. All three times were positive, with no exceptions.

· This Cycle: Outperforming Expectations

A 41% gain in one year has already surpassed the performance of any previous rate cut cycle for the same period. Why so strong?

First, central bank buying. In 2024, global central banks bought over 1,000 tons of gold, a record. China, Russia, India, and others are all increasing holdings. They don't want all their foreign reserves in dollars—so-called "de-dollarization."

Second, geopolitical risk. The Ukraine crisis and Middle East conflicts have made parts of the world increasingly unstable, and gold's rally increasingly includes a "war premium."

Third, offsetting inflation expectations. The U.S. government debt-to-GDP ratio now exceeds 120%, with a $2 trillion annual fiscal deficit. Where does this money come from? Only by printing. Gold is the traditional hedge against currency depreciation. When investors worry about the dollar's purchasing power, gold rises. Bitcoin has this logic too, but the market still trusts gold more.

Performance over the past year:

· Gold: +41% ($2,580→$3,640)

· Bitcoin: +92% ($60,000→$115,000)

On the surface, Bitcoin wins hands down. But considering the market cap difference—gold at $15 trillion and Bitcoin at $2.3 trillion—gold's 41% gain actually absorbed more capital. Historically, when gold's rate cut cycle gain exceeds 35%, it usually enters a consolidation phase. The reason is simple—profits need to be digested.

Final Thoughts

In September 2025, we stand at an interesting point in time.

The rate cut cycle has been underway for a year—not too fast, not too slow. Bitcoin at $115,000—not too high, not too low. Market sentiment is greedy but not crazy, cautious but not panicked. This in-between state is the hardest to judge and tests patience the most.

History tells us that the second half of a rate cut cycle is often more exciting. After the last two rate cuts in 1995, the U.S. stock market kicked off the Internet bull run. Six months after the 2020 rate cut, Bitcoin truly took off.

If history rhymes, the next 6-12 months may be a key window.

But history also tells us there are always surprises. Maybe this time, the surprise is an AI-driven productivity explosion, inflation disappears, and the Fed can cut rates indefinitely. Or maybe the surprise is escalating geopolitical conflict or a new financial crisis.

The only thing we can be sure of 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 investment category, but a microcosm of this era of change. So, rather than obsessing over whether Bitcoin will reach $150,000 or $200,000, ask yourself:

Am I ready for this changing backdrop?

If your answer is yes, congratulations. The rate cut cycle is just the beginning—the real show is yet to come.