Grayscale: Bitcoin is bullish if the Federal Reserve does not raise interest rates

Author: Zach Pandl, Head of Research at Grayscale; Translation: @金色财经xz

Since the Iran war broke out in late February, U.S. stocks have risen by 9%, Bitcoin has fallen by 1%, and gold has dropped by 20% (see below). Despite massive AI spending boosting the stock market, Bitcoin and gold have lagged, partly because the market expects the Federal Reserve to raise interest rates to curb inflation. We disagree with this expectation. Our baseline view is that the Federal Reserve will hold steady and not raise rates. If our view is correct, Bitcoin prices could catch up to stock market gains.

Since the Iran war began, the one-year Federal Reserve rate expectations have increased by about 60 basis points, and roughly half of Fed officials believe a rate hike may be necessary by 2026. The European Central Bank has already raised interest rates. As interest-free monetary assets, gold and Bitcoin compete with fiat currency. Rising real interest rates increase the opportunity cost of holding Bitcoin and gold, thereby suppressing demand.

We believe Bitcoin has a dual nature in a portfolio: both as a scarce digital commodity serving as a long-term store of value, and as a public blockchain asset that can benefit from the long-term growth of the crypto industry. This makes Bitcoin similar to — but not exactly the same as — gold and growth stocks in a portfolio. If this is correct, Bitcoin can serve as a diversification tool in a portfolio and appears attractively valued at current prices.

Key point: Since the Iran war, Bitcoin and gold have underperformed the stock market, partly due to market expectations of Fed tightening. But if the probability of rate hikes decreases — consistent with our baseline scenario — Bitcoin could catch up and match stock market performance.

Since the Iran war began, the performance of stocks, gold, and Bitcoin: