In the week following the Federal Reserve’s significant rate cut, leading cryptocurrency ETFs, such as the iShares Bitcoin Trust ETF (IBIT) and the iShares Ethereum Trust ETF (ETHA), outperformed traditional stock and bond benchmarks.
From the market’s open on September 18, when the Fed announced a 50-basis-point rate cut, until the close yesterday, IBIT surged nearly 8%, while ETHA soared over 15%. In contrast, stocks, as measured by the SPDR S&P 500 ETF Trust (SPY), rose by only 1.5%, and bonds, tracked by the iShares Core U.S. Aggregate Bond ETF (AGG), saw a slight decline of 0.1%.
The broader cryptocurrency market also rallied last week, with inflows totaling $321 million, according to CoinShares. This trend followed the larger-than-expected rate cut from the Federal Open Market Committee (FOMC).
Despite expectations of gains in tech-led S&P 500 ETFs and modest relief for bond funds, investor interest last week clearly shifted toward cryptocurrencies.
Why Are Crypto ETFs Outperforming?
Several factors likely contributed to the outperformance of cryptocurrency ETFs following the Fed’s rate cut:
- Risk-On Sentiment: Lower interest rates typically create a favorable environment for riskier assets like cryptocurrencies. Investors move away from safer assets such as bonds and money markets, seeking higher returns in equities and digital currencies, driving up demand and prices for crypto-related ETFs.
- Technical Factors: Short-term technical trends, such as chart patterns or momentum indicators, may also have fueled the rise in cryptocurrency ETF prices.
- Weaker U.S. Dollar: Rate cuts can lead to a weaker dollar, making it less attractive to foreign investors. This often results in increased investment in alternative assets like cryptocurrencies and gold, which are seen as hedges against currency devaluation.
- Increased Liquidity and Market Confidence: Lower rates generally lead to greater liquidity in financial markets. This benefits speculative and growth-focused investments, such as cryptocurrencies, and in turn, boosts the value of crypto ETFs.
In summary, the Fed’s rate cut has sparked increased risk appetite, weakened the dollar, enhanced liquidity, and reinforced crypto’s role as an inflation hedge—key drivers of the strong performance of crypto ETFs.